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Lockup agreements prohibit company insiders including employees, their friends and family, and venture capitalists from selling their shares for a set period of time. The terms of lockup agreements may vary, but most prevent insiders from selling their shares for 180 days.
A lock-up agreement is a contractual provision preventing insiders of a company from selling their shares for a specified period of time. They are commonly used as part of the initial public offering (IPO) process.
Lock-up Agreement. A legally binding contract between the insiders and underwriters of a company prohibiting the sale of its shares within a specified period.
A lock-up agreement prohibits company insiders, such as employees and venture capitalists, from selling their shares for a set period of time. That agreement may require you to sign the lock-up agreement. If not, and if you are no longer affiliated with the company, you may not have to sign.
It is a contractual caveat outlining a period after a company has gone public when major shareholders are prohibited from selling their shares. Lock-up periods usually last between 90 and 180 days. Once the lock-up period ends, most trading restrictions are removed.
The main purpose of an IPO lock-up period is to prevent flooding of the market with too many shares, which will lower the stock's price. The lock-up period is also important because large stock sales by people close to the company may give the impression of a lack of confidence in its prospects.
One of the scariest things about IPO stocks is the lockup expiration date. This is the date when insiders, like employees and venture investors who we previously locked into holding their shares can sell their stock. Often, these insiders hold the vast majority of a freshly public company's outstanding shares.
Once past that date (the lockup expiry date), these shareholders are generally free to trade their stock unless they remain insiders. Since a lockup expiry releases a number of shareholders to trade, volume usually increases on that day and thereafter, increasing the liquidity or float of a given stock.
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