What Is a Lock-Up Agreement and How Does It Work?

A lock-up agreement is a private contract that keeps company insiders from selling their shares for a set period after a major event, most often an initial public offering. The standard term is 180 days. Underwriters require it so founders, executives, employees, and pre-IPO investors can’t dump their stock the moment trading begins and sink the price for the new public shareholders who just bought in. No SEC rule mandates a lock-up. It’s a deal between the company, its insiders, and the investment banks running the offering.¹

Who Signs One

The underwriter drives the lock-up. Before taking a company public, it insists that anyone holding a meaningful block of pre-IPO stock sign, because the pitch to new investors depends on the promise that insiders won’t cash out on day one.

Signatories usually include the founders, executive officers, and board members. Employees who received stock grants or options before the offering sign as well. So do the outside investors who backed the company during its private years: venture capital firms, private equity funds, and angel investors. Those funds tend to hold the largest blocks, and their exit alone could overwhelm the market for a newly traded stock.¹

What the Agreement Restricts

The restrictions go well beyond a plain ban on selling shares. A well-drafted lock-up blocks any transaction that lets a signatory reduce their economic exposure to the stock, even while technically keeping ownership. The point is to make sure insiders carry the same risk as everyone else throughout the restricted period.

Outright sales are prohibited, whether on the open market or through a private deal. The agreement also reaches more creative moves:

Short sales, meaning selling borrowed shares of the company to profit from a price decline.
Derivative contracts such as total return swaps that shift the economic risk of ownership to a counterparty.
Collars and other hedging structures that cap the upside and downside, letting an insider monetize the stock’s value without technically selling it.
Pledging shares as collateral for a margin loan or personal debt, which gives the lender the right to seize and sell if the borrower defaults.

Employees with vested stock options run into a related wrinkle. Most lock-ups don’t stop employees from exercising options and converting them into shares. But those shares are locked up the moment they exist, so the employee can’t sell them until the restriction lifts. That matters for tax planning: exercise can trigger a tax bill even though the shares can’t be sold to pay it.

Common Exceptions

Most agreements carve out narrow exceptions for transfers that don’t add selling pressure to the public market. The common thread is that the shares stay restricted in the hands of whoever receives them.

Estate-planning transfers are the most typical. An insider can gift shares to immediate family, move them into a family trust, or contribute them to a family limited partnership or LLC. Charitable donations of locked-up shares are usually allowed. Transfers required by law, such as a court-ordered division of assets in a divorce, are another standard carve-out.

Every exception carries the same condition: the recipient has to sign a written agreement binding them to the same lock-up terms as the original holder. The restriction follows the shares, not the person. A founder who gifts locked-up stock to a trust hasn’t freed anything; the trust can’t sell until the original period runs.

How Long Lock-Ups Last

The 180-day lock-up is the industry standard for traditional IPOs. Almost every major underwriter insists on that duration, and departures are rare enough to draw attention.¹ The clock starts on the date the IPO prospectus becomes effective, not the first day of public trading, though those dates are usually close together.

Staggered Release Schedules

Some recent IPOs have used staggered schedules that free portions of the restricted stock at different intervals rather than releasing everything on one day. Snowflake released 25% of locked-up shares after 91 days. DoorDash released 40% after 91 days. Braze released 20% after just 50 days. Toast tied an early release of 15% to its first earnings report. The idea is to spread selling pressure across several dates instead of concentrating it on one.

Performance-Based Early Release

A newer variation ties early release to the stock price. If shares trade above a specified threshold for a sustained stretch, a portion of the lock-up lifts early. The threshold is expressed as a percentage above the IPO price, and in practice it has ranged from 20% to 50% above that price. The typical trigger is that the stock must close above the threshold for at least 10 out of 15 consecutive trading days. Snowflake’s 2020 IPO, for example, required the stock to exceed 133% of its $120 IPO price for 10 of 15 trading days before 25% of locked-up shares released.

What Happens When It Expires

The expiration date draws heavy attention from analysts, traders, and existing shareholders, because it’s the moment a large supply of previously restricted shares becomes eligible for sale. Trading volume typically runs above average that day, and stocks often face downward price pressure as insiders begin selling.

Rule 144 Still Applies to Affiliates

Expiration isn’t a green light for everyone. Company officers, directors, and major shareholders (collectively “affiliates” under securities law) still have to comply with SEC Rule 144 when they sell.

The key Rule 144 requirements for affiliates:

Holding period: restricted securities of a company that files regular SEC reports must be held for at least six months before any sale. For non-reporting companies, the period is one year.²
Volume cap: in any rolling three-month period, an affiliate can’t sell more than the greater of 1% of the outstanding shares or the average weekly trading volume over the prior four weeks.³
Manner of sale: affiliate sales have to be handled as routine trades. Brokers can’t receive more than a normal commission, and neither the seller nor the broker can solicit buy orders.

Non-affiliates who aren’t officers, directors, or large shareholders have an easier path. Once the six-month holding period is met and the lock-up has expired, they face no volume limits or manner-of-sale restrictions.³

In practice, the 180-day lock-up and the six-month Rule 144 holding period overlap almost perfectly for most IPO shares. Affiliates who acquired shares at different times, or who received additional grants after the IPO, need to track each lot’s holding period separately.

Lock-Ups Outside Traditional IPOs

The traditional IPO is the most common setting, but lock-ups show up in other corporate transactions too.

Direct Listings

In a direct listing, a company goes public without issuing new shares or using an underwriter in the traditional sense. Because there’s no underwriter managing the offering, lock-up agreements haven’t been a standard feature, and most shares in a direct listing have been available for sale immediately. A company considering a direct listing can still adopt lock-ups voluntarily if it wants to help stabilize early trading.

SPACs

Special purpose acquisition companies have their own dynamics. When a SPAC merges with a private target, the target’s shareholders who receive SPAC shares are typically subject to a 180-day lock-up similar to a traditional IPO. Sponsors, meaning the team that created the blank-check company, face a longer restriction, usually one year. The mismatch produces a natural stagger: target shareholders can sell months before sponsors can.

Stock-for-Stock Mergers

Lock-ups also appear in stock-for-stock mergers, where the acquirer pays for the target with newly issued shares. Target shareholders receiving acquirer stock may be required to hold it for a set period. The reasoning tracks the IPO case: preventing a wave of selling from former target shareholders who have no long-term interest in owning the acquirer.

How to Find a Specific Company’s Lock-Up Terms

Federal securities laws require companies to disclose the terms of any lock-up in their registration documents, including the prospectus filed with the SEC.¹ To find the specifics for a given company (who signed, how long it runs, what exceptions exist, whether any early release provisions apply), pull the S-1 registration statement from the SEC’s EDGAR database. The lock-up terms are usually in the “Shares Eligible for Future Sale” section of the prospectus. You can also contact the company’s shareholder relations department directly.

If you’re evaluating a recently public company, the expiration date is worth marking. It tells you when a wave of new supply could hit the market, and if insiders hold a large share of the total outstanding stock, that day can move the price.

Consequences of Breaking a Lock-Up

Because the lock-up is a private contract rather than a securities regulation, violations are handled as contract breaches rather than SEC enforcement actions. The practical consequences are severe enough that intentional breaches are extremely rare.

The first line of defense is mechanical. The company’s transfer agent is instructed to block any transfer of restricted shares before the lock-up expires, so a casual attempt to sell simply won’t clear. If an insider finds a way around that barrier, the company or underwriter can seek a court injunction to halt the transaction before it settles.

Beyond stopping the sale, the breaching party faces potential liability for damages suffered by the company or the underwriting syndicate. If an unauthorized sale tanks the stock price or disrupts a secondary offering, the financial exposure can be significant. The reputational damage tends to be worse. An insider known for breaking a lock-up will find future investors, board members, and business partners reluctant to trust them, and that kind of damage is hard to undo.

1
U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements
2
U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities
3
eCFR. 17 CFR 230.144