Understanding IPO Lockups: Definition, Purpose, and Expiry Impacts

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An IPO lockup is a contractual restriction that bars company insiders and pre-IPO shareholders from selling or hedging their shares for a set period after a company goes public, typically 90 to 180 days. It covers founders, executives, employees, venture capital and private equity backers, and other early holders. Investors who buy the stock on the open market after it starts trading are not covered.

How a Lockup Agreement Works

Before an IPO, the lead underwriters ask insiders and major holders to sign lockup agreements. A typical agreement prohibits selling, pledging, shorting or using options to hedge the covered shares until the restriction ends. The period is usually counted from the date of the final prospectus, so the expiry date can be worked out once the deal prices.

Because the agreement is a private contract between the holders and the underwriters, its terms vary from deal to deal:

• Length. It can be shorter or longer than 180 days, and different groups of holders may have different terms.
• Staged or early release. Some agreements free a portion of shares after an earnings report or if the stock trades above a set level for a defined stretch.
• Waivers. Underwriters can release holders early, in whole or in part. Releases of this kind are generally disclosed.

A company that goes public often sells only a fraction of its outstanding shares in the offering. The rest stays with insiders and early investors, and the lockup is what keeps that larger block off the market during the first months of trading.

Why Lockups Exist

A new listing has no trading history, and early liquidity can be thin. If a large holder sold its entire stake in the first week, the extra supply could push the price down for everyone, including the investors who just bought in the offering. The lockup gives the market time to establish a trading range based on ordinary supply and demand.

It also gives the market more information before insiders can sell. A 180-day window often spans one or two quarterly earnings reports as a public company, and options on the stock may begin trading during the period. Buyers in the IPO get some assurance that the people who know the business best are holding their shares through that early stretch.

What Happens When a Lockup Expires

At expiry, previously restricted shares become eligible for sale. Eligible does not mean sold. Some holders sell to diversify or realize gains, while others keep part or all of their stake.

The effect often starts before the date itself. Traders who expect selling pressure may short the stock into the expiry, and long holders may hedge with options, for example by buying puts or setting up a collar. One academic study by Eli Ofek and Matthew Richardson at NYU found that stock prices tended to fall by roughly 1% to 3% around lockup expiration and did not recover that loss.

A decline is not guaranteed, and a stock can rise at expiry. If short sellers crowd into the trade and borrowing costs climb, a squeeze can follow when they rush to cover. Shake Shack is a well-known case: a squeeze began the day before its first lockup expiration on July 28, 2015, and the stock rose more than 30% in less than two weeks, while the cost to borrow shares for shorting had exceeded 100%. Light insider selling at expiry can also remove the overhang that was weighing on the price.

Worked example (hypothetical)

Assume a company has 100 million shares outstanding and sells 20 million in its IPO. The other 80 million are locked up for 180 days, and none face any other restriction.

• Shares freely tradable during the lockup: 20 million.
• Shares eligible for sale after expiry: up to 100 million, five times the prior float.
• If the stock trades an average of 2 million shares a day, the 80 million newly eligible shares equal 40 days of normal volume.

These ratios show how much potential supply is arriving. Actual pressure depends on how many holders choose to sell.

Does the Lockup Matter for Regular Investors?

It does not restrict shares you buy on the open market, even on the first day of trading. You can sell those whenever you like.

It can still affect what you own. Heading into an expiry date, the extra potential supply, short selling and hedging activity can move the price, and some investors time purchases around the date because the stock may be weak beforehand. Whether buying after expiry works out depends on how insiders actually behave, not on the date alone.

If you received an allocation in the offering through a broker, read the terms that came with it. Lockup agreements are usually signed by insiders and pre-IPO holders, but some brokers limit or discourage quick resale (“flipping”) of IPO allocations.

Employees should treat the lockup as one of several limits. Company trading windows, blackout periods and vesting schedules can keep them from selling even after the lockup ends.

Do SPACs Have Lockups?

Yes. A special purpose acquisition company raises money in its own IPO and then looks for a private company to merge with. Sponsors and holders of the acquired business are commonly locked up for 6 to 12 months or longer after the merger closes. The terms are set in the deal documents and differ between transactions.

Lockups vs. Similar Restrictions

Lockup vs. Rule 144. A lockup is a contract. SEC Rule 144 is a regulation that governs resale of restricted securities and sales by affiliates. When a lockup ends, affiliates such as directors and large holders may still face Rule 144 volume limits and filing requirements.

Lockup vs. vesting. Vesting decides when an employee actually earns equity. A lockup restricts selling shares the holder already owns. Unvested shares cannot be sold regardless of the lockup.

Lockup vs. quiet period. The post-IPO quiet period limits research published by the underwriters’ analysts. It does not restrict share sales.

Lockup vs. regulatory lock-in. In some markets, regulators require lock-ins. India, for example, imposes mandatory lock-ins on promoters and anchor investors. In the U.S., the restriction is contractual.

Limitations

• Averages hide variation. Study findings describe tendencies across many IPOs. Individual stocks, especially high-profile tech or unicorn listings with heavy venture backing, can behave very differently.
• It does not address valuation. A lockup controls the timing of insider sales. It says nothing about whether the IPO price was fair.

The Bottom Line

Lockups matter most to investors holding or eyeing a recent IPO, since expiry can release a large block of sellable shares relative to the float. Shares bought on the open market are never restricted, but price moves around the expiry date can still affect them. The outcome depends on how much insiders actually sell, so check the S-1 for terms and weigh insider behavior over the date alone.