A lock-up period is a set stretch of time, usually right after an IPO, when company insiders aren’t allowed to sell their shares. Insiders usually means founders, directors, employees, and early backers like venture capital firms. The lock-up is agreed in advance with the banks running the IPO and is set out in the prospectus.
It varies, but 90 to 180 days is common. Some lock-ups, particularly for directors, run for a year or more. They can also be staggered, releasing shares in chunks over time.
If everyone who owned shares before the IPO could sell on day one, a flood of shares could hit the market and knock the price down. A lock-up gives the newly listed company time to settle into the rhythms of being public, and signals insiders are committed and not just looking to cash in on a day-one pop in the value of their shares.
Once the lock-up expires, insiders are free to sell. They don’t have to, and many don’t. But if lots of shares are sold at once, the share price can dip. That’s why some investors keep an eye on lock-up expiry dates, which are usually public. Depending on where a company is listed, insiders may have to notify the company and market whenever they buy or sell shares, and there could be continuing restrictions on their trading, such as in the periods around earnings updates.
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