What it means
After a company lists on a stock exchange, only a small share of its stock may be available to trade. Founders, early investors and employees hold the rest.
A lockup agreement, signed with the underwriting banks, prevents these insiders from selling for a set time, commonly 90 to 180 days, so that a flood of shares does not hit the market just after the offering. The reasoning is simple.
If insiders could sell at once, new investors might worry that the people who know the business best are leaving. A lockup signals commitment and supports an orderly market during the early trading period.
The expiry date is watched closely. When the lockup ends, a large number of shares can suddenly become tradable, increasing supply, which can put pressure on the share price.
Analysts therefore track lockup expiry dates, although the price effect depends on how much was expected and how many holders actually sell. Hedge funds and private funds use lockups differently.
An investor commits to leave money in the fund for a minimum time, often a year or more, so the manager can invest in less liquid assets without worrying about redemptions. A fund may also use gates, which limit how much can be withdrawn at once.
Lockup terms are negotiated and vary. Some include staged releases, where a portion is freed early if the share price meets a target or after results are published.
Anyone holding restricted shares should read their agreement and plan for tax and liquidity needs well before the expiry date. For employees, a lockup can be frustrating, because shares that look valuable on paper cannot yet be turned into cash.
Staff may still owe tax when shares vest during the lockup, so they should plan how to fund it. Some companies arrange a limited sale programme to help with this.
In practice
Real-world examples.
Example
A software founder owns 25,000,000 shares after the company's IPO and has agreed to a 180-day lockup. She cannot sell any of them until the period ends. She plans her finances using her salary during that time. She also asks her adviser about the tax due when the shares can finally be sold.
Example
A hedge fund requires a one-year lockup for new investors. An investor puts in $500,000 in January and cannot withdraw before the following January. The manager uses the stable capital to hold harder-to-sell positions. The investor accepts the restriction in return for lower fees.
Example
An analyst covering a recently listed biotech firm notes that the lockup expires next month. She expects more shares to be available and warns clients about possible price pressure. She also checks which holders are likely sellers. Her note recommends waiting for the first quarterly results.
Formula
Calculation
Free float after expiry = Shares already trading + Shares released
A company has 20,000,000 shares trading after its IPO and 60,000,000 shares held by insiders under a lockup. When the lockup ends, tradable shares rise to 20,000,000 + 60,000,000 = 80,000,000, four times the earlier number. At a share price of $15, the market value of the shares released is 60,000,000 x $15 = $900,000,000. If insiders sold 10% of the released shares, that would be 6,000,000 shares, or $90,000,000 of supply entering the market.Case study
Seen in the real world.
Pelham Biosystems is an illustrative, fictional company that went public at $20 per share with a 180-day lockup on insiders. At the offering, only 15,000,000 of its 75,000,000 shares were available to trade.
As the lockup expiry approached, the share price drifted down by about 8%, as some investors sold in anticipation of increased supply. On the expiry date, the venture investors sold a modest part of their holdings, while the founders held on to theirs.
The price dipped briefly and then recovered as quarterly results came in strong. The story is illustrative, but it shows that lockup expiry is an event to plan for rather than a guaranteed fall, and that the response depends on the company's performance. The company published the expiry date in its investor calendar.
Watch out
Common mistakes.
- Assuming the share price always falls when a lockup ends, when markets often anticipate the event.
- Ignoring the lockup when valuing insider-held shares, which cannot be sold or pledged freely during the period.
- Confusing a lockup with vesting, which is the schedule on which employees earn the right to their shares.
Questions
People also ask.
How long does an IPO lockup last?
Often 90 to 180 days, though the exact period is negotiated and set out in the offering documents.
Who is subject to a lockup?
Usually company officers, directors, early investors and sometimes employees who hold shares or options.
Can a lockup be released early?
Yes, the underwriters can sometimes agree to an early release, and some agreements release part of the shares if certain conditions are met.
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