A lock-up period, also known as a lock in, lock out, or locked up period, is a predetermined amount of time following an
initial public offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
where large shareholders, such as company executives and investors representing considerable ownership, are restricted from selling their
shares
In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...
.
Generally, a lock-up period is a condition of exercising an
employee stock option
Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options.
Employee stock options are commonly viewed as an internal agreement prov ...
. Depending on the company, the IPO lock-up period typically lasts between 90 and 180 days before these shareholders are allowed the right, but not the obligation, to exercise the option.
Lockups are designed to prevent insiders from liquidating assets too quickly after a company goes public. When employees and pre-IPO investors initially get their shares or options, they sign a contract with the company that typically prohibits trades for the first 90–180 days after a future IPO. When the company is ready to go public, the underwriting bank then reaffirms the existing agreements in new contracts. This helps to ensure the market will not disproportionately increase the supply, which drives prices downward. While lockups used to be simple—usually lasting 180 days for everyone—they have become increasingly complex.
Usually employees and early investors want shorter lockups (so they can cash out sooner) while the underwriting banks want longer ones (to keep insiders from flooding the market and sinking the share price). The company is often somewhere in the middle—wanting to keep employees and investors happy but not wanting it to look like insiders don't have faith in it.
References
Stock market
Investment
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