Lock-Up Period
A lock-up period is a contractual restriction that prevents company insiders — including executives, directors, employees, and pre-IPO investors — from selling their shares for a specified period after the IPO, typically 90 to 180 days.
The lock-up period is one of the most practically significant features of an IPO for investors to understand. When a company goes public, its founders, management team, early employees with vested stock options, and pre-IPO investors such as venture capital and private equity funds collectively hold a large number of shares. If all of these holders were permitted to sell immediately after the IPO, the resulting supply could overwhelm demand and push the stock price sharply lower. The lock-up agreement is designed to prevent this outcome by creating a structured period during which insiders cannot sell.
Lock-up agreements are not required by law; they are contractual arrangements negotiated between the company, its underwriters, and the relevant shareholders. In practice, underwriters insist on lock-up provisions as a condition of taking a company public, because their institutional clients who purchased IPO shares expect some protection against immediate insider selling. The duration is most commonly 180 days, though some agreements are shorter (90 days) or longer (240 to 365 days), particularly for special purpose acquisition companies (SPACs).
The expiration of a lock-up period is a closely watched event in the market. When the lock-up expires, insiders become legally free to sell, and a wave of selling can depress the stock price — particularly if the company's post-IPO performance has been disappointing and insiders are eager to monetize. Academic studies have found that stocks on average underperform in the weeks surrounding lock-up expiration, though the effect varies widely by company.
Underwriters sometimes have the discretion to waive lock-up restrictions earlier than scheduled, typically when the company wants to conduct a secondary offering or when certain conditions in the market are favorable. Any waiver of lock-up restrictions must be disclosed to investors. In addition, a trading plan under SEC Rule 10b5-1 can allow insiders to pre-schedule sales during the lock-up period in limited circumstances, but actual sales generally cannot begin until after expiration.
Retail investors monitoring a newly public company should track the lock-up expiration date, which is disclosed in the S-1 and in subsequent SEC filings. Many financial data providers also list expected lock-up expiration dates alongside IPO calendars.