What Is an IPO Lockup Period?

Introduction

When a company goes public through an initial public offering, or IPO, there is a lot of excitement. But a few months later, the stock sometimes drops suddenly for a reason that has nothing to do with the business itself. Often, the cause is the end of the lockup period.

What Is a Lockup Period?

A lockup period is a set amount of time after an IPO during which company insiders, like founders, employees, and early investors, are not allowed to sell their shares. Lockups usually last 90 to 180 days. The rule is not a law but an agreement with the banks that help run the IPO.

Why Lockups Exist

Lockups help keep the stock price stable after the IPO. If insiders sold huge amounts of stock right away, the flood of shares could push the price down. A lockup also shows public investors that insiders believe in the company's future.

What Happens When It Ends

When the lockup expires, insiders are free to sell. If many of them do, the extra supply of shares can push the price lower. Investors often watch lockup expiration dates closely, and stocks sometimes fall in the days before as traders anticipate the selling.

Conclusion

Lockup periods are a small detail with a big impact. Knowing about them helps you understand why newly public stocks can suddenly move and makes you a more informed investor!