Lock-Up Period
A lock-up period is the time after an IPO — usually 180 days — during which insiders and pre-IPO shareholders agree not to sell, so the market absorbs the offering before it absorbs them. The same term covers shares received as consideration in an acquisition, locked for a year or two to keep the seller aligned. At expiry the locked shares can be sold, and the price often says so.
- Also known as
- Lock-up, Lock-up agreement, Post-IPO lock-up
- Used at
- IPOs (a contractual agreement between the underwriters and each holder); acquisitions paid in shares; some private funding rounds and secondary sales
- Binding
- yes — a lock-up agreement with the underwriters or a clause in the sale agreement; the underwriters may release holders early, and often do in stages
- Typical term
- 180 days after an IPO, sometimes staggered (a third released at 90 days, the rest at 180) or tied to earnings releases; one to two years for acquisition consideration, often with a third released each year
- Typical effect
- shares tend to weaken into and on the expiry date as the market anticipates selling — a well-documented pattern the market has not arbitraged away — and companies time results and news around it
- Parties
- the company, its founders, employees and venture investors (the locked holders), the underwriters who hold the agreements, and the market
How a lock-up period works in practice
Before an IPO the underwriters ask every meaningful holder — founders, employees with options, venture funds, early investors — to sign a lock-up: no sales, pledges or hedges for 180 days after listing without the banks' consent. The banks want it because an IPO sells perhaps 15% of the company, and a market that has just absorbed that cannot absorb the other 85% arriving the next week; the holders accept it because the IPO does not happen otherwise. At day 180 the restriction ends, and the venture funds that have waited seven years, and the employees who have waited for the price, are free.
The expiry is an event. Analysts count the shares released and the likely sellers; the price typically drifts lower in the weeks before and falls on the day, then recovers as the supply is absorbed — or does not, if the sellers are many and the buyers few. Companies manage it: staggered releases, early partial releases when the price is strong, results scheduled just before expiry so that the news is out, and quiet words with the largest funds about selling in blocks rather than into the market.
In acquisitions the logic is alignment rather than absorption: a founder paid in the buyer's shares and free to sell on completion has no reason to help the integration succeed; a two-year lock-up gives one.
Example
A payments fintech lists at €20 selling 15% of its shares; 85% — 85m shares held by two venture funds, the founders and 900 employees — is locked for 180 days. The shares reach €31 by month four. In month five the underwriters release 10% of each holder's lock-up early, and the funds sell €120m of shares in two placings at €29 without disturbing the market. On day 180 the remaining 76m shares are released; the price falls from €28.50 to €25.40 in the week, as the employees sell and the funds place another block, and recovers to €27 by month eight. The founders, whose acquisition of a smaller competitor a year later is paid partly in shares, lock the sellers of that company for two years — because they have now seen what expiry looks like from the other side.
Common mistakes
- A lock-up with no staggering, so every holder is released on one day into one market. - Employees planning their finances around the IPO price and meeting the expiry price instead. - Underwriters releasing holders early without telling the market, which finds out from the trades. - Acquisition consideration in shares with no lock-up, so the sellers' first act as shareholders is to leave. - Forgetting the lock-up in a fintech whose regulatory approval named the locked holders as controllers — selling below the threshold needs a filing too.