Lock-Up Agreement

What it is

A lock-up agreement is a contractual restriction that prevents company insiders—such as executives, employees, and early investors—from selling their shares for a specified period after an initial public offering (IPO). Underwriters commonly require these agreements to limit selling pressure in the early months of public trading.

Key takeaways

• Temporarily bars insiders from selling shares after an IPO to reduce immediate supply and stabilize the stock.
• Typical lock-up periods are about 180 days, but they can range from 90 days to a year and may be staggered by insider class.
• Expiration often leads to increased selling and stock-price declines, which can be either a buying opportunity or an early warning that the IPO was overpriced.

How lock-up agreements work

• Duration and structure: Lock-up periods most often last around 180 days. All insiders may share the same expiration or face staggered dates so different groups can sell at different times.
• Who requires them: Although not mandated by federal securities law, underwriters typically insist on them as part of the IPO. Some state “blue sky” laws or listing agreements may also influence lock-up use.
• Disclosure: Details of lock-up terms are disclosed in a company’s offering documents and public filings (for example, filings available through public EDGAR-type systems or a company’s investor relations).

Purpose

The main goal is to protect new investors from a flood of insider selling immediately after the IPO. Early backers or employees who received equity at much lower valuations may have strong incentives to sell once the company goes public. Lock-ups align short-term incentives by delaying those potential exits, helping give the market time to absorb shares and evaluate the company on fundamentals rather than immediate insider liquidity events.

Market effects and investor considerations

• Price impact: When lock-ups expire, a concentrated supply increase can push the stock price down—studies show this is a common outcome and often results in abnormal negative returns around expiration.
• Staggered expirations: Contrary to intuition, staggered lock-ups can sometimes create prolonged selling pressure and greater negative impact than a single expiration date.
• Investment strategy: A post-lock-up decline may present a buying opportunity if the company’s fundamentals remain strong. Conversely, heavy insider selling at expiration can signal that insiders believe the IPO price was overvalued, possibly indicating longer-term weakness.

Example scenario

If a company goes public with a 180-day lock-up, insiders cannot sell until day 181. If many insiders then sell large blocks of shares, the sudden increase in supply can push the market price down. Investors should watch the lock-up schedule before and after an IPO to anticipate potential volatility and reassess value based on fundamentals rather than short-term trading flows.

Conclusion

Lock-up agreements are a common tool used to stabilize post-IPO markets by delaying insider sales. They reduce immediate selling pressure but can introduce predictable volatility when they expire. Investors should review lock-up terms in offering documents and consider both the timing and scale of potential insider selling when evaluating newly listed stocks.