What it means
When a private company goes public, only a slice of its shares is actually sold in the offering. The rest sits with founders, staff and venture backers who have often waited years for a chance to cash out.
A lock-up agreement puts a legal pause on that selling so the new market has time to settle. The standard term is 180 days from the listing date, though 90 days and a full year both appear, and staged releases are increasingly common.
A staged lock-up might free a quarter of the shares after 90 days, another quarter after 180 days, and the balance after twelve months. Lock-ups are private contracts, not a rule imposed by regulators.
That means the underwriters who wrote them can waive them early, and they sometimes do when the share price is strong and there is investor appetite for more stock. An early waiver often reads as a negative signal, because it suggests insiders are keen to sell.
Lock-ups also appear outside listings, particularly in mergers where a target's owners receive shares in the buyer. Restricting resale keeps the buyer's share price from being pressured by sellers who never wanted the stock in the first place.
For anyone analysing a newly listed company, the expiry date belongs on the calendar. Trading volume typically rises around expiry and the price often softens, so the date is a genuine input to timing decisions rather than a technicality.
In practice
Real-world examples.
Example
A biotechnology company lists in April with a 180 day lock-up covering its two founders and three venture funds. A specialist investor building a position deliberately waits until October, expecting the extra supply at expiry to offer a better entry price.
Example
A marketing agency is acquired for a mix of cash and buyer shares, with the sellers' shares locked for two years and released in four equal tranches. The buyer wants the founders focused on the business rather than on a quick exit, and the staged release does that without needing an earnout.
Example
A newly listed retailer performs strongly and its underwriters agree to release a third of the locked shares two months early so a large index fund can buy a meaningful stake. The stock dips on the announcement because the market reads the waiver as insiders wanting out.
Formula
Calculation
There is no single formula, but the figure that matters is how much of the company becomes freely tradable when a lock-up ends.
Locked Share Overhang = Locked Shares / Total Shares Outstanding
A software company lists with 40,000,000 shares outstanding. The offering places 8,000,000 shares with public investors, and the remaining 32,000,000 shares are held by founders, staff and venture funds under a 180 day lock-up.
Locked share overhang = 32,000,000 / 40,000,000 = 0.80, or 80%
The freely traded float on day one is therefore 8,000,000 shares, or 20% of the company. If the agreement releases 25% of the locked shares after 90 days, that is 32,000,000 x 0.25 = 8,000,000 additional shares, doubling the float to 16,000,000 shares, or 40% of the company.
At a share price of $30, the released tranche has a market value of 8,000,000 x $30 = $240,000,000, which is a large amount of potential supply for a stock whose daily volume might be a fraction of that.Case study
Seen in the real world.
Northwind Analytics is a fictional company created to illustrate how lock-up agreements are negotiated and how they play out. Ahead of its listing, its underwriters asked all insiders to sign a flat 180 day lock-up covering 32,000,000 of the 40,000,000 shares outstanding. Two venture funds pushed back, arguing that a single expiry date would concentrate selling pressure into one week.
The compromise was a staged agreement: 25% released at 90 days, a further 25% at 180 days, and the remainder at 270 days. The illustrative point is that the total supply reaching the market was unchanged, but it arrived in three smaller waves rather than one.
In the fictional aftermath, the share price fell about 4% around the first release and barely moved at the second and third. Northwind's board concluded that spreading the expiry had cost the insiders nothing and had spared the stock a single disorderly session.
Watch out
Common mistakes.
- Believing a lock-up is a legal requirement. It is a private contract between insiders and the underwriters, which is exactly why it can be waived or renegotiated.
- Assuming every insider is covered. Coverage is defined in the agreement, and shares bought on the open market after listing are often excluded entirely.
- Reading an early release as good news. A waiver usually signals that insiders want liquidity sooner, and the market often marks the shares down when one is announced.
Questions
People also ask.
Where can the lock-up terms be found?
They are disclosed in the offering prospectus and in the underwriting section of the listing documents, so the dates and covered holders are public.
Does a lock-up guarantee the share price will hold?
No, it only removes one source of selling pressure, and a company can still fall on weak trading or poor market conditions.
What happens to employees with vested options during a lock-up?
They generally cannot sell either, since option shares are typically covered by the same agreement until it expires.
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