Lockup Agreements

Although they are not required by law, almost all underwriting contracts contain so-called lockup agreements. Such agreements specify how long insiders must wait after an IPO before they can sell some or all of their stock. Lockup periods have become fairly standardized in recent years at 180 days. Thus, following an IPO, insiders can't cash out until six months have gone by, which ensures that they maintain a significant economic interest in the company going public.

Lockup periods are also important because it is not unusual for the number of locked-up shares to exceed the number of shares held by the public, sometimes by a substantial multiple. On the day the lockup period expires, there is the possibility that a large number of shares will hit the market on the same day and thereby depress values. The evidence suggests that, on average, venture capital-backed companies are particularly likely to experience a loss in value on the lockup expiration day.

lockup agreement

The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.

0 0

Post a comment