Understanding Lock-Up Periods After an IPO: A Comprehensive Guide

A lock-up period, also called a locked-up, lock-in or lock-out period, refers to the predetermined time frame in which corporate insiders, investors, and employees are not allowed to sell or redeem their shares after an initial public offering (IPO)Initial Public Offering (IPO)An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family, and business investors such as venture capitalists or angel investors). Learn what an IPO is. It normally happens in instances where a private entity offers its initial public stock issuance.

The management and initial large stockholders of a publicly-traded company Private vs Public CompanyThe main difference between a private vs public company is that the shares of a public company are traded on a stock exchange, while a private company's shares are not.are forbidden to sell their shares immediately following an IPO.

The law usually does not oblige businesses that want to go public to follow a lock-up period. The lock-up period is normally something that the company and/or the investment banksList of Top Investment BanksList of the top 100 investment banks in the world sorted alphabetically. Top investment banks on the list are Goldman Sachs, Morgan Stanley, BAML, JP Morgan, Blackstone, Rothschild, Scotiabank, RBC, UBS, Wells Fargo, Deutsche Bank, Citi, Macquarie, HSBC, ICBC, Credit Suisse, Bank of America Merril Lynch underwriting the IPO request. The purpose is to prevent excessive volatility and allow the market to find the stock’s true value.

How Long is a Lock-up Period?

The lock-up period is usually 90–180 days, depending on the company. Although lockups used to be fairly simple – typically lasting 180 days –  they are gradually becoming more complex.

Investors and employees usually want lockups that are shorter so that they can cash out earlier. Underwriting banks often want lockups that are longer to prevent insiders from dropping the share price. The company is usually somewhere in the middle. They want to ensure that the investors are happy but do not want it to seem like insiders lack faith in the stock.

What is the Purpose of an IPO Lock-up Period?

A company usually brings in more money when the price and demand for the stock are up. When a private entity goes public, many key employees usually want to cash in their stock as quickly as possible. The main purpose of an IPO lock-up period is to prevent flooding of the market with too many shares, which will lower the stock’s price.

The lock-up period is also important because large stock sales by people close to the company may give the impression of a lack of confidence in its prospects. It is common for the stock price of a company to go down permanently after the end of the lock-up period.

At times, corporate insiders can’t sell their shares even after the expiry of the lock-up period because they possess substantial, nonpublic information and, therefore, a sale would be considered as insider tradingInsider TradingInsider trading refers to the practice of purchasing or selling a publicly-traded company’s securities while in possession of material information that is. A similar scenario may occur, for instance, if the expiry of the lock-up corresponded with earnings season.

Key Takeaways

An IPO lock-up period is a contractual constraint that inhibits business insiders holding stock before the company goes public from selling their stock for a period. Such Insiders may include company owners, founders, employees, managers and venture capitalists.

The purpose of lockups is to stop corporate insiders from hastily liquidating assets after the company’s IPO. It helps ensure that the stock price will not decline from a sudden flood of selling.

The lock-up period for freshly issued public shares helps stabilize the price of the stock on entering the market. When corporate insiders sell their shares in the company to the public, it may appear that the company is not worth investing in.

More Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Investing: A Beginner’s GuideInvesting: A Beginner's GuideCFI's Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading
• Irrevocable ProxyIrrevocable ProxyAn irrevocable proxy is an enforceable power granted by the owner to another party to exercise his voting rights independently, without requiring his consent each time. Typically, most proxies are revocable, but some agreements may include specific clauses that require the proxy to be irrevocable for a specified period.
• Sale and Purchase AgreementSale and Purchase AgreementThe Sale and Purchase Agreement (SPA) represents the outcome of key commercial and pricing negotiations. In essence, it sets out the agreed elements of the deal, includes a number of important protections to all the parties involved and provides the legal framework to complete the sale of a property.
• Voting TrustVoting TrustA voting trust is an arrangement where the voting rights of shareholders are transferred to a trustee for a specified period. The shareholders are then