Lock-Up Periods: When You Can’t Sell Yet

A lock-up period is a predetermined length of time during which certain shareholders are restricted from selling their company shares. Think of it as a temporary “no trading” zone. It’s common after an initial public offering (IPO) but can also appear in other situations like private funding rounds. While it might seem frustrating, lock-up periods serve important purposes for both the company and its investors.

Why have lock-up periods?

• Stabilize Stock Price: After an IPO, flooding the market with a large volume of shares can significantly drop the price. Lock-up periods help avoid this sudden sell-off, creating a more stable and predictable market for the newly public company. It gives the company time to demonstrate its performance and build investor confidence.
• Signal Investor Confidence: The existence of a lock-up, particularly after an IPO, can signal to the broader market that key insiders believe in the company’s long-term prospects. They’re essentially saying, “We’re in this for the long haul.”
• Protect Early Investors: Lock-ups can protect early investors who took on more risk by investing when the company was private. It gives them a fair chance to benefit from the IPO before a potential flood of shares impacts the price.

Who is affected by lock-ups?

Lock-ups typically apply to company insiders like:

• Founders and Executives: They often hold substantial equity and their selling activity could be interpreted negatively by the market.
• Early Investors (e.g., Venture Capitalists, Angels): These investors often have large holdings and are subject to lock-up agreements to prevent immediate profit-taking after an IPO.
• Employees with Stock Options or RSUs: Employees granted equity as compensation might also be subject to lock-up restrictions, particularly if the equity is tied to performance milestones.

How long do lock-ups last?

Lock-up periods typically range from 90 to 180 days after an IPO, but this can vary based on the company and its underwriting agreement. For example, a high-demand IPO might have a shorter lock-up, while a more volatile market might lead to a longer one. Private funding rounds can also include lock-up agreements with varying durations.

What happens after the lock-up period expires?

When the lock-up expires, insiders are free to sell their shares. It’s important to understand that this doesn’t mean everyone will sell—many insiders continue to hold their shares if they believe in the company’s future. However, the increased potential for selling can cause some price volatility.

What about secondary markets and lock-up periods?

Even during a lock-up period, there can be limited opportunities for private share sales through secondary markets. These sales usually involve a more complex process and require approval from the company. Earlyasset can help navigate these complexities. Check out Selling Your Shares with Earlyasset The Process for more information. It’s important to remember that even in the secondary market, restrictions from your shareholder agreement or company policy might still apply during a lock-up.

So here’s what we covered:

• What lock-up periods are and why they exist.
• Who is typically affected by lock-ups.
• The typical duration of a lock-up period.
• What happens after the lock-up period expires.
• How lock-ups relate to secondary market transactions.