Lock-up Period
The lock-up period is a contractually agreed timeframe after a company's IPO during which founders, employees, and early investors are prohibited from selling their shares. It typically lasts 90 to 180 days and is meant to prevent the stock price from collapsing due to mass selling right after launch.
When a company goes public for the first time, it sells shares of itself. Such shares are called stock, and whoever owns them belongs to the company to a tiny extent. But many people already own shares beforehand: the founders, long-standing employees, and investors who invested early. This group is not allowed to sell their shares for a period of time after the stock market debut. This exact restriction period is the lock-up period. It is contractually established beforehand and typically lasts 90 to 180 days.
Why the price would otherwise collapse
The price of a stock arises from supply and demand. If suddenly very many owners want to sell but hardly anyone wants to buy, the price falls. Without a lock-up period, hundreds of existing owners could exit simultaneously on the very first trading day. The price would crash before a realistic price could even form.
The lock-up period is therefore also a signal of trust. A founder who is not allowed to sell for half a year is in the same boat as the new investors. If the price falls, he himself loses money. Investors read this as a sign that the insiders believe in their own company.
Conversely, investors watch the end of the period very closely. The day on which the restriction expires is called the lock-up expiry. It is not uncommon for the price to fall in the days beforehand, because the market expects additional sales. For some well-known technology companies, the decline around this date was in the double-digit percentage range.
Who sets the restriction and how it ends
The lock-up period is not set by law. It is an agreement between the company and the banks that organize the IPO. These banks are called underwriting banks, and they are responsible for ensuring that the shares are placed at a stable price. They insist on the restriction because an immediately crashing price also damages their own reputation.
Almost always, all so-called insiders are affected. This includes executives, founders, employees with stock options, and venture capital investors. Retail investors who buy shares on the first trading day are never affected. They are allowed to sell again at any time.
Modern contracts often don’t lift the restriction all at once. Tiered models are common: after 90 days, a quarter of the shares become free, after 180 days the rest. Some contracts contain a price clause. If the price is significantly above the issue price, the restriction ends earlier. The banks can also approve individual sales ahead of schedule.
Lock-ups in AI IPOs and crypto projects
In financial news, the term comes up whenever a well-known company has recently gone public. Following IPOs of chip and AI companies, media regularly report on the upcoming lock-up expiry. Analysts then publicly calculate how many additional millions of shares could come onto the market. This figure is called the supply overhang.
The principle also exists outside classic IPOs. In crypto projects, new digital coins are often released according to a fixed schedule so that the team does not sell them immediately. This is usually referred to as vesting rather than lock-up. The idea behind it is the same.
A common misconception: the end of the restriction does not mean that selling actually happens. It only means that selling is now permitted. Many founders continue to hold their shares for years. Anyone buying a stock shortly after an IPO should nevertheless know this date — it is a well-known point in time for increased price volatility.