The total stock is worth about 1% of the company, or $197m (£128m).
The plan is to "reinvest directly in our people," said Mr Dorsey, who was appointed as the company's permanent leader earlier this month. Twitter did not comment further on the decision.
Last week the company said it would lay off 336 workers, or 8% of staff.
Mr Dorsey, who took over as temporary chief in July after Dick Costolo resigned, also tweeted "I'd rather have a smaller part of something big than a bigger part of something small."
Last week, former Microsoft chief executive Steve Ballmer said he bought a 4% stake in Twitter, making him the third-biggest individual shareholder. Mr Ballmer now owns more of Twitter than Mr Dorsey, who owns about 3%.
One Twitter employee told the BBC's New York business correspondent Michelle Fleury via Twitter that "folks are ready to run through walls for him and the company. Before...and even more now."
Twitter chief executive and co-founder Jack Dorsey has said he will give a third of his shares in the firm to employees.