What is an IPO Lockup?
How Does an IPO Lockup Work?
In an initial public offering (IPO) often receive stock or can exercise options and warrants that have been given during the non-public phase of the company's growth. The issuance of stock to employees during an IPO is usually staged in order to encourage investors to purchase shares in the company and to stabilize the stock price after initial entry into the market.
With the issuance of stock to employees, the company signals the market that the stock is worth holding. Sell-offs of the company's stock by key employees are not in the interest of the company. In addition, the company wants to keep the demand (and price) high for the stock. One way to do that is to limit the ability of company employees to sell shares on the market, usually for a period of 90 to 180 days.
Why Does an IPO Lockup Matter?
During the long, hard, cash-starved period of growth in a company's climb towards an initial public offering, key employees often work for little cash in exchange for equity in the company. Stock, for these employees, represents the reward for putting in time and deferring their higher paychecks. Therefore, it is not surprising that employees would want to trade some of the stock for cash as soon as possible.
From the company's perspective, putting off that payday a little longer is in the best interest of the company and helps towards stabilizing the stock price or even sending it higher. Employees with company stock shares during an IPO Lockup need to wait until the end of the IPO Lockup period and hope that the company’s stock price will be favorable at that time.