An IPO lock-up period is a contractual window after a company goes public during which insiders are barred from selling their shares on the open market. Most run 180 days, though terms range from 90 days to a full year depending on how the deal was negotiated.1U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements The point is to keep a wave of insider selling from crashing the stock while the market is still figuring out what the company is worth. Whether you hold vested options, invested early, or are a public investor trying to anticipate supply, the restriction shapes when shares actually hit the market.
Who the Agreement Binds
Lock-up agreements cover everyone with early access to the company’s equity. Founders, executive officers, and board directors are almost always included. Employees who received stock options or restricted stock through compensation are typically covered too. Early-stage investors, including venture capital firms and angel investors who funded the company before it went public, sign the same agreements.
Federal securities law separately classifies many of these people as “insiders” under Section 16 of the Securities Exchange Act, which covers every director, every officer, and any beneficial owner of more than 10% of a class of the company’s equity securities.2eCFR. 17 CFR 240.16a-2 – Persons and Transactions Subject to Section 16 The lock-up and Section 16 overlap but do different work. The lock-up is a private contract enforced by the underwriter. Section 16 is a federal reporting obligation that keeps running after the lock-up ends. An insider who sells shares after the lock-up expires still must file a Form 4 with the SEC within two business days of the trade.
What the Lock-Up Prohibits
A typical agreement bars insiders from selling, pledging, gifting, or otherwise transferring their shares during the restricted period. Most agreements also prohibit any transaction that effectively shifts the economic risk of ownership to someone else, even if the insider still technically holds the shares.3U.S. Securities and Exchange Commission (EDGAR). Lock-Up Agreement (Exhibit 10.6)
That means derivative hedges on locked-up shares are off the table. Buying put options, entering equity swaps, establishing collars, or writing covered calls against the stock are all prohibited. So is publicly announcing an intention to enter such a transaction.3U.S. Securities and Exchange Commission (EDGAR). Lock-Up Agreement (Exhibit 10.6) The logic is simple. If an insider could buy protective puts the day after the IPO, the lock-up would mean nothing, because the insider would already have locked in an exit price.
How Long It Lasts and Where to Find the Terms
The SEC does not set a required length. Duration is negotiated between the company and its underwriters as part of the IPO process, and 180 days is the industry default, with most agreements landing between 90 and 180 days.1U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements
Federal securities law requires companies to disclose lock-up terms in their registration documents, including the prospectus.1U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements To find the specifics, search for the company’s S-1 filing on the SEC’s EDGAR database at sec.gov/edgar/search. Enter the company name or ticker, filter by “Registration statements and prospectuses,” and look for the section labeled “Shares Eligible for Future Sale” or “Underwriting.” The full agreement is often attached as an exhibit to the S-1 or to the underwriting agreement. These documents give you the exact expiration date, the parties covered, and any conditions that might shorten or extend the restriction.
Early Release and Carve-Outs
Lock-ups are not always all-or-nothing. Many include staggered release provisions that free portions of restricted stock when the share price exceeds specified thresholds for a sustained period. These price triggers reward strong market performance while preventing a full liquidation on day one.
Carve-outs also exist for transfers that don’t add shares to the open market. Insiders can typically move shares to family trusts or charitable organizations, but only if the recipient agrees to stay bound by the original lock-up restrictions. Estate planning moves like these let insiders manage personal finances without flooding the market with additional supply.
Underwriters can waive the restrictions early, but not quietly. When an underwriter releases an officer or director from a lock-up, the company must announce the upcoming release by press release through a major news service at least two business days before the waiver takes effect. The waiver itself does not become effective until two business days after that announcement, giving the market time to absorb the news.4U.S. Securities and Exchange Commission (EDGAR). Form of Lock-Up Agreement Transfers made without any consideration, where the recipient agrees to the same lock-up terms, are generally exempt from this announcement requirement.
Setting Up a 10b5-1 Plan During the Lock-Up
Insiders who want to sell in an orderly, pre-scheduled way often use Rule 10b5-1 trading plans. These let an insider set up future trades at a time when they don’t possess material nonpublic information, and the trades then execute automatically regardless of what the insider learns later. Setting up a plan during the lock-up is allowed under some agreements, but no trades can execute until the lock-up expires.
The SEC tightened the rules on these plans in recent years. Directors and officers must wait through a cooling-off period before any trades under a new or modified plan can begin. That period is the later of 90 days after adopting the plan or two business days after the company discloses financial results for the quarter in which the plan was adopted, capped at 120 days. Non-officer, non-director insiders face a shorter 30-day cooling-off period.5U.S. Securities and Exchange Commission. Insider Trading Arrangements and Related Disclosure Fact Sheet Directors and officers must also certify in writing that they are not aware of material nonpublic information at the time they adopt the plan and that the plan is being adopted in good faith.
The practical result: an insider can’t set up a 10b5-1 plan on the day the lock-up expires and sell the next morning. Between the lock-up and the cooling-off period, the earliest realistic sale date for a director or officer is roughly three months after the lock-up ends, assuming the plan is adopted on the expiration date itself.
What Happens When the Lock-Up Expires
Expiration makes previously restricted shares eligible for public trading, but eligible does not mean insiders can sell freely without any rules. Two frameworks still govern what happens next: Rule 144 and Section 16 reporting.
Rule 144 Limits for Affiliates
Rule 144 sets the conditions under which restricted and control securities can be sold on the open market. For shares in a reporting company, the insider must have held them for at least six months. For a non-reporting company, the holding period is one year.6U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities Since most newly public companies are reporting companies and the lock-up itself usually runs 180 days, the six-month holding period is generally satisfied by the time the lock-up ends.
Affiliates face more. The number of shares an affiliate can sell in any three-month window cannot exceed the greater of 1% of the company’s outstanding shares or the average weekly trading volume over the four weeks before the sale.6U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities For a company with 100 million shares outstanding and modest trading volume, that 1% floor lets the affiliate sell up to one million shares per quarter. Affiliates must sell through standard broker transactions or directly to market makers, and they cannot solicit buyers or arrange special deals.
An affiliate whose Rule 144 sale exceeds 5,000 shares or $50,000 in value must file a Form 144 notice with the SEC.7eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters Since April 2023, these filings must be submitted electronically through EDGAR.8U.S. Securities and Exchange Commission. File Form 144 Electronically Non-affiliates who have held restricted shares for at least one year and have not been affiliates for the prior three months can sell without regard to Rule 144’s volume, manner-of-sale, or filing requirements.
Price Impact at Expiration
Lock-up expirations tend to push stock prices down. A study of over 1,000 IPOs found that shares dropped an average of about 1.15% on the expiration date, with a cumulative decline of roughly 2% over the surrounding four-day window. Trading volume jumped by roughly 38% as insiders began selling.9NYU Stern School of Business. The IPO Lock-Up Period: Implications for Market Efficiency And Downward Sloping Demand Curves The decline did not reverse in the days that followed, suggesting it reflected a permanent increase in available supply rather than a temporary panic.
Public investors watch expiration dates closely for this reason. A company where insiders hold 70% of outstanding shares will see a very different expiration-day dynamic than one where insiders hold 20%. The S-1 prospectus usually discloses both the lock-up terms and the number of shares subject to restriction, which lets investors estimate the potential supply increase in advance.
Taxes on Post-Lock-Up Sales
The tax bill from selling post-IPO shares can be substantial, and timing matters. The IRS distinguishes between short-term and long-term capital gains based on how long you held the asset. If you sell shares you held for one year or less, any gain is taxed as ordinary income at your marginal rate. Hold for more than one year, and the gain qualifies for long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.10Internal Revenue Service. Topic no. 409, Capital Gains and Losses
Because most lock-ups last only 180 days, insiders who sell right at expiration are almost certainly facing short-term treatment. Waiting another six months to cross the one-year threshold can roughly cut the tax rate in half for high earners. That calculus drives real behavior: some insiders hold past expiration purely for tax reasons, even when they’re eager to diversify.
High-income insiders also need to account for the 3.8% net investment income tax, which applies on top of capital gains rates when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.11Internal Revenue Service. Net Investment Income Tax For a founder selling millions in stock, that surtax adds meaningfully to the total.
One tax decision that shapes the post-lock-up picture happens years earlier. Employees and founders who received restricted stock (not options) could file a Section 83(b) election within 30 days of the grant, paying ordinary income tax on the stock’s then-value and establishing a low cost basis so later appreciation is taxed as capital gain.12Internal Revenue Service. Section 83(b) Election Whether that election was filed changes the tax math dramatically by the time the lock-up ends and the shares can finally be sold.
Direct Listings and SPACs Work Differently
Traditional IPOs are not the only path to public markets. In a direct listing, where a company lists its shares on an exchange without issuing new stock or using underwriters, there is no underwriting agreement and no standard lock-up. Existing shareholders can sell from day one. Spotify and Slack went public through direct listings, and their insiders faced no contractual restriction on selling. Investors evaluating a direct listing should assume the full share count is available from the first day of trading.
SPAC transactions sit in between. The sponsors who organized the blank-check company and provided initial capital typically face lock-ups of one year or longer, since the sponsors need time to identify and close an acquisition before their shares should trade freely. Shareholders of the target company that merges with the SPAC usually face the standard 180-day restriction. Some SPAC agreements include price-based triggers that can shorten the sponsor’s lock-up if the stock trades above specified thresholds for a sustained period.