UPDATE: TheDeal.com hears that $100 million of the $500 million offer was cash.

EARLIER: Facebook offered to buy Twitter for $500 million of overvalued Facebook stock, Kara Swisher says. Twitter rejected the offer for several reasons:

At Facebook's real valuation, $5 billion or so, the offer only amounted to $150 million (not bad for two-year old company with no revenue, but a far cry from the billion-dollar dream)

(not bad for two-year old company with no revenue, but a far cry from the billion-dollar dream) Twitter has high hopes for its own secret revenue model which will be announced next year.

Twitter's investors aren't stupid: They wanted cash. Facebook presumably doesn't have that much cash to spare.

Kara Swisher:

The $500 million offered was in an all-stock form, said sources on both sides, at the $15 billion valuation that came from the Microsoft investment in the company last October.

The Twitter side felt that figure was inflated and the shares should be valued at the lower figures that have also been reported for Facebook’s true valuation, more in the $5 billion range.

That would have given the deal a $150 million price tag, which was seen as too low, especially since it was in Facebook stock and not cash.

In fact, Twitter wanted cash, which was not possible for Facebook, or Facebook stock at an even lower valuation that $5 billion.

But, said several sources close to Twitter, the primary reason for not selling was because its board simply did not want to yet or perhaps ever.

Said one source: “The question is, is it really a good idea to sell on the first chance you get?”...

“It’s more about timing,” said one person familiar with Twitter’s motivations. “There is a strong feeling that there is still an opportunity–even with the economic downturn–to blow this thing out.”

Photo: BusinessWeek

See Also: Twitter: We'll Announce Our Secret Business Model Early Next Year