What Is a Lock-Up Period and How Does It Work?

If you’re thinking about your company public, you should familiarize yourself with lock-up periods. Many businesses use initial public offerings (IPOs) to raise capital. With an IPO, you can sell an equity stake in your company while taking it public. Rather than being privately traded, your company will then be publicly traded. But IPOs — as well as mergers — have a lock-up period.

What Is a Lock-Up Period and How Does It Work?

The Basics of Lock-Up Periods

A lock-up period is a period during which sales and transfers of a newly IPO’d company’s stock are prohibited by the insiders. It’s essentially a contract between the company and its shareholders. The contract states that, after going public, insiders won’t be able to sell or transfer stock until the end of the lock-up period.

How a Lock-Up Period Works

While they can be structured in different ways, most lock-up periods prohibit insiders from selling or transferring stock for 90 to 180 days. When a company initially goes public, for instance, its owners won’t be able to sell or transfer their stock shares — at least not initially. They’ll have to wait until the end of the lock-up period, which can range from three to six months. Only after the lock-up period has passed will insiders be able to sell and transfer their stock shares.

Why Lock-Up Periods Exist

You might be wondering what purpose, if any, lock-up periods serve. Without a lock-up period, insiders will be able to sell their stock shares immediately when the company for which they work goes public.

Insiders may own stock shares of the company before it goes public. But just because they own stock shares, that doesn’t mean they can sell them. Assuming the company is still private, insiders won’t have anyone to whom they can sell the stock shares. An IPO or merger, though, may offer insiders the opportunity to sell their stock shares. As the company goes public, investors will be able to trade it on stock exchanges. Insiders can particulate just like all other investors by buying or selling shares of their company’s stock on a stock exchange.

A lock-up period will help to stabilize and preserve the company’s stock price as it goes public. Insiders may hold a lot of shares. If there’s not a lock-up period, some insiders may sell a large number of stock shares, causing the stock price to plummet. Therefore, companies use lock-up periods as a form of protection for their stock price and protection for public investors.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.