What Is A Lock-Up Period?

When a company goes public, the things everybody tends to focus on are valuation, share price and whether investors think the stock will soar or sink. But there’s another part of the IPO process that’s often missed, and that is the lock-up period.

If you’ve been following discussions around potential future IPOs from companies like OpenAI, Anthropic or Stripe (or any of the other countless smaller startup IPOs), you may have come across the term. But unlike a lot of business and startup lingo, it’s not exactly self-explanatory.

What Is A Lock-Up Period?

A lock-up period is a set period of time after a company goes public during which certain shareholders are not allowed to sell their shares; a waiting period of sorts. These shareholders typically include founders, executives, employees and early investors who owned stock before the IPO.

Basically, their shares are “locked up” for a predetermined period, and they don’t have any access to them during this time. Most lock-up periods last between 90 and 180 days, although the exact length can vary depending on the company and the agreement reached with the banks underwriting the IPO.

Why Do Lock-Up Periods Exist?

It’s  a bit of a saefty measure for the company, but it’s a little bit more complicated than that. After all, if a company has just gone public, and it’s jumped through the manyy hoops required to get to this point, why shouldn’t founders, employees and investors be free to sell their shares immediately?

It’s all about supply and demand. When a company first lists on a stock exchange, only a portion of its shares are typically available for public trading. So, if thousands of employees and investors suddenly tried to sell large amounts of stock at the same time, it could flood the market with new shares and put significant downward pressure on the share price, making it less valuable than it should be.

Lock-up periods are designed to prevent exactly that problem. They give the market time to establish a price for the stock and help reduce the risk of extreme volatility during the company’s first few months as a public business. They can also provide new investors with some extra reassurance that company insiders aren’t rushing for the exits the moment trading begins.

Who Is Usually Affected By a Lock-Up Period?

A lock-up period generally applies to the people who owned shares before the IPO. That can include founders, senior executives, employees with stock options or equity awards, venture capital firms, early-stage investors, board members and other major shareholders.

Public investors who buy shares during the IPO or shortly afterwards aren’t normally not subject to the lock-up restrictions.

What Happens When The Lock-Up Period Ends?

Once the lock-up expires, insiders are then free to sell their shares if they choose to do so. That doesn’t mean they will definitely sell, but the possibility is enough to attract attention from investors.

This is because the end of a lock-up period can dramatically increase the number of shares available for trading. If a significant number of insiders decide to cash out, the sudden increase in supply can put pressure on the stock price.

This is one reason investors often keep a close eye on lock-up expiry dates. In some cases, stocks fall as the expiry approaches because the market anticipates insider selling. In others, little happens at all because insiders continue holding their shares.

The reaction often depends on investor sentiment and what the sales (or lack of sales) appear to signal about management’s confidence in the company.

What Happens When the Lock-Up Period Expires?

It’s easy to assume that insiders selling immediately as the lock-up period is a bad sign, but it’s actually more complicated than that.

Founders, employees and early investors often have a large percentage of their personal wealth tied up in a single company. So once the lock-up period ends, they may choose to sell some shares simply to diversify their finances, pay taxes or realise gains after years of waiting. Indeed, it may be more about their general investments rather than getting rid of that specific share or stock. Thus, in the same breath, it follows that choosing not to sell doesn’t automatically mean the company is destined for success.

So, a lock-up expiry is simply one factor among many that investors consider when evaluating a newly public company.

Why Is a Lock-Up Period Important?

For startup founders, employees and investors, a lock-up period is an important part of the journey from private company to public company. For everyone else, it’s a reminder that an IPO isn’t a single event; rather, it’s a process that continues long after the opening bell rings.

In many respects, lock-up periods do end up drawing some attention. After all, they can influence share prices, affect investor confidence and provide one of the first major tests of how the market feels about a newly listed business.

And if some of today’s AI giants eventually make the leap to public markets, don’t be surprised if discussions about their lock-up periods become almost as closely watched as the IPOs themselves…