A period after an IPO (typically 90-180 days) during which insiders (founders, employees, early investors) cannot sell their shares. Prevents a flood of selling that could tank the stock price. After the lock-up expires, insiders can begin selling, often in a controlled manner.
lock-up period
noun — A contractual restriction, typically lasting 90 to 180 days following an initial public offering, during which company insiders (founders, employees, early investors, and board members) are prohibited from selling their shares on the public market. Lock-up agreements are standard practice required by IPO underwriters to prevent a sudden oversupply of shares from destabilizing the stock price in the period immediately following listing.
Why it matters
For employees and founders, the lock-up period means that an IPO does not immediately equal liquidity. Even though the stock is trading publicly, insiders cannot sell their shares for months. During that time, the stock price can move dramatically. Employees who are "paper millionaires" on IPO day may find their shares worth significantly less by the time they can actually sell.
Understanding lock-up periods helps employees and founders plan their finances and avoid counting on proceeds they cannot access yet. A stock that IPOs at $50 per share might be trading at $30 by the time the lock-up expires — a 40% decline that turns a theoretical windfall into a disappointing outcome. This scenario has played out many times and is why pre-IPO financial planning is so important.
The lock-up expiration date is also significant for short-term traders and institutional investors who may bet on or hedge against the expected selling pressure. Employees should be aware that the market will often price in anticipated insider selling as the lock-up date approaches.
How it works
Lock-up agreements are not required by law but are standard practice required by the underwriting banks (Goldman Sachs, Morgan Stanley, etc.) that manage the IPO. The underwriters want an orderly market for the new stock, and a sudden rush of insider selling would undermine investor confidence and tank the price.
The lock-up typically lasts 180 days from the IPO date and applies to founders, employees, early investors, board members, and anyone who received pre-IPO shares. During the lock-up, these insiders cannot sell, transfer, or hedge their shares. Some companies use staggered lock-ups, where different groups are allowed to sell at different times.
When the lock-up expires, there is often a noticeable increase in trading volume and sometimes a temporary dip in stock price as insiders begin to sell. Many financial advisors recommend that employees develop a selling plan before the lock-up expires rather than making emotional decisions based on short-term price movements. Pre-established 10b5-1 trading plans allow insiders to schedule future sales in advance, providing a defense against insider trading allegations.
| Structure | How it works | Common in |
|---|---|---|
| Standard 180-day | All insiders locked for 180 days from IPO | Most traditional IPOs |
| Staggered release | Different groups release at 90 and 180 days | Companies with large employee shareholder bases |
| Performance-based release | Lock-up releases only if stock stays above a threshold | SPAC mergers (common structure) |
| Early release | Underwriter waives lock-up before expiration | Well-performing stocks; secondary transactions |
History and origin
Lock-up periods emerged as a standard practice in the U.S. IPO market during the 1980s and 1990s as the volume of technology company listings grew. In the early days of the modern IPO market, there were no formal restrictions on when insiders could sell, which occasionally led to dramatic post-IPO selloffs that damaged the stock price and public investor confidence. Underwriters began requiring lock-up agreements as a condition of managing IPOs, and the practice quickly became universal.
The dot-com bubble of the late 1990s highlighted the risks of lock-up expirations. Many dot-com companies went public at enormous valuations, and when the six-month lock-up expired for these companies, insider selling coincided with — and in some cases accelerated — the market correction. The resulting losses for public investors who had bought near the IPO price created significant regulatory scrutiny of IPO practices.
The Securities and Exchange Commission (SEC) has considered but not mandated lock-up requirements, leaving them as a market practice rather than a legal requirement. SPAC mergers, which became popular in 2020 and 2021, introduced new variations on the lock-up concept — including performance-based lock-up releases tied to the stock price — as sponsors sought to align their incentives with public investors more effectively.
Frequently asked questions
What is a lock-up period?
A lock-up period is a contractual restriction that prevents insiders — founders, employees, early investors, and board members — from selling their shares for a defined period after an IPO. The standard lock-up is 180 days from the IPO date. Lock-up agreements are not required by law but are routinely required by the underwriting banks managing the IPO.
Why do underwriters require a lock-up period?
Underwriters require lock-ups to protect the new public market for the stock. If insiders could immediately sell large quantities of shares after the IPO, the sudden supply would likely depress the price and undermine investor confidence. A lock-up gives the market time to establish an orderly trading pattern before insider supply enters.
What happens when the lock-up period expires?
When the lock-up expires, insiders can begin selling their shares on the open market. This often causes increased trading volume and sometimes a temporary dip in the stock price as the market anticipates or absorbs insider selling. Many financial advisors recommend that employees develop a selling plan in advance rather than making emotional decisions on the expiration date. Pre-established 10b5-1 trading plans allow insiders to schedule future sales in a legally protected way.
Can lock-up periods be released early?
Yes. The underwriting banks can waive the lock-up restriction early if they believe the market can absorb the additional supply without disruption. Early lock-up releases are typically granted to specific shareholders — often for secondary sales to institutional investors — rather than to all insiders simultaneously.
What is a staggered lock-up?
A staggered lock-up releases different groups of shareholders at different times. For example, employees might be permitted to sell 25% of their shares at 90 days and the remainder at 180 days. This approach smooths out the supply pressure at lock-up expiration and can reduce the typical post-lock-up price dip.
Does the lock-up period apply to all shareholders?
Lock-up agreements typically apply to founders, employees, early investors, board members, and any other holder of pre-IPO shares. Public investors who bought shares in the IPO are not subject to a lock-up. The IPO prospectus specifies who is subject to the lock-up and the exact terms. Employees should review their specific agreements, as individual terms can vary.
Do lock-up periods exist outside of IPOs?
Yes, in a limited sense. Some private company equity grants and secondary transactions include transfer restrictions that function similarly to a lock-up. Company bylaws and shareholder agreements often include right of first refusal provisions that limit when and to whom shares can be sold before a formal exit.
Learn more
- Secondary markets for startup equity: how to access liquidity before an exit
- What is a cap table and why does it matter?
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