Lockup

A lockup agreement is a contract between pre-IPO shareholders (employees, early investors, founders) and the IPO underwriters, prohibiting the sale of shares for a defined period after listing — standardly 90 to 180 days. The lockup protects the IPO price from being immediately undercut by a wave of insider selling.

For pre-IPO buyers, the lockup is a critical consideration: even after a successful IPO, they cannot exit immediately. If the stock price falls sharply in the lockup window, a position that was profitable at the IPO open can become a loss by the time they are able to sell.

Illustrative example: a secondary fund buys shares at $10.00. The company IPOs at $20.00 — a 100% paper gain on the opening day. However, the fund is locked up for 180 days. By day 180, the stock has retraced to $14.00 due to market conditions. The actual realized gain is 40%, not 100%.

The gotcha: lockup periods can be extended, waived for certain sellers (sometimes favoring institutional holders over employees), or ended early at underwriter discretion if market conditions are favourable. Some companies have "soft lockups" or staggered releases. Investors should read the exact terms of any lockup agreement, not just assume the standard 180-day window applies uniformly to all shareholder classes.