What Is a Lock-Up Agreement: Terms, Duration, and Exceptions

A lock-up agreement is a private contract that prevents company insiders from selling their shares for a set period after a major event, most often an initial public offering. The standard runs 180 days. Underwriters require these agreements so that founders, executives, employees, and early investors can’t unload stock the moment trading starts and crush the price for the new public shareholders who just bought in. No SEC rule mandates them. They exist because the investment banks running the deal insist on them and negotiate the terms with the company and its insiders.1U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements

Who Is Bound by It

The underwriter drives the lock-up. Before taking a company public, it requires anyone holding a meaningful block of pre-IPO stock to sign on. The pitch to new public investors depends on the promise that insiders aren’t heading for the exit.

Signatories typically include:

  • Company founders, executive officers, and board members.
  • Employees who received stock grants or options before the offering.
  • Outside investors from the company’s private years: venture capital firms, private equity funds, and angel investors.

Those outside investors matter as much as the insiders on the org chart. They often hold large blocks, and a coordinated exit by pre-IPO backers can overwhelm the market for a newly traded stock on its own.1U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements

What the Agreement Actually Restricts

A well-drafted lock-up does more than ban selling shares. It blocks any transaction that lets a signatory reduce their economic exposure to the stock, even while technically keeping ownership. The point is to keep insiders’ financial interests aligned with the new public shareholders throughout the restricted period.

Straightforward sales are prohibited, on the open market or in a private deal. So are the more creative workarounds:

  • Short sales of the company’s stock.
  • Derivative contracts, such as total return swaps, that transfer the economic risk of ownership to a counterparty.
  • Collars and other hedging structures that let an insider monetize the stock’s value without selling it.
  • Pledging shares as collateral for a margin loan or personal debt, which would give the lender the right to seize and sell them.

Employees with vested stock options run into a related wrinkle. Most lock-ups don’t stop them from exercising options and converting them into shares. But the resulting shares are locked up the instant they exist, so the employee can’t sell to cover the tax bill that exercising can trigger. It’s a planning problem worth flagging before the exercise, not after.

Exceptions That Are Usually Allowed

Most agreements carve out narrow exceptions for transfers that don’t add new selling pressure to the public market. The common thread: 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 members, move them into a family trust, or contribute them to a family limited partnership or LLC. Charitable donations of locked-up shares are also generally permitted. 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 trust that receives gifted shares from a founder can’t sell them until the original lock-up period runs out.

How Long a Lock-Up Lasts

The 180-day period is the overwhelming industry standard for traditional IPOs, and departures from it are rare enough to attract notice.1U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements 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

Rather than releasing every locked-up share on the same day, some recent IPOs have used schedules that free portions of the stock at intervals. Snowflake released 25% of locked-up shares after 91 days. DoorDash released 40% on the same 91-day mark. Braze released 20% after just 50 days. Toast tied an early release of 15% to its first earnings report. Each of these structures spreads selling pressure across multiple 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 period, a portion of the lock-up lifts early. Thresholds have ranged from 20% to 50% above the IPO price, and the typical trigger is closing 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 came free.

What Happens When the Lock-Up Expires

The expiration date draws heavy attention from analysts and traders, because a large supply of previously restricted shares becomes eligible for sale on that day. Above-average trading volume is common, and in many cases the stock faces downward pressure as insiders begin selling.

But expiration isn’t a free-for-all, particularly for company officers, directors, and major shareholders. Under securities law, those people are “affiliates,” and SEC Rule 144 continues to govern their sales even after the private lock-up lifts.

The key Rule 144 conditions for affiliates are:

  • Holding period. Restricted securities of a company that files regular SEC reports must be held at least six months before any sale; for non-reporting companies, the holding period is one year.2U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities
  • Volume cap. In any rolling three-month period, an affiliate cannot sell more than the greater of 1% of the outstanding shares or the average weekly trading volume over the prior four weeks.3eCFR. 17 CFR 230.144
  • Manner of sale. Affiliate sales must 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 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.3eCFR. 17 CFR 230.144

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 received additional grants after the IPO, need to track each lot’s holding period separately.

Where Lock-Ups Show Up Beyond IPOs

Traditional IPOs are the most common setting, but the same contract appears elsewhere.

In a direct listing, no underwriter manages a new share issuance, so lock-ups have not historically been standard and most shares are available for sale immediately. A company pursuing a direct listing can still adopt one voluntarily if it wants to steady early trading.

In SPAC mergers, shareholders of the target company who receive SPAC shares are typically subject to a 180-day lock-up similar to a traditional IPO. SPAC sponsors, the team that created the blank-check company, usually face a longer restriction of about one year. That mismatch produces a natural stagger.

Lock-ups also appear in stock-for-stock mergers. Target shareholders who receive acquirer stock may be required to hold it for a specified period, on the same logic as an IPO: preventing a wave of selling from people who have no long-term interest in the acquirer.

How to Find the Terms for a Specific Company

Federal securities laws require companies to disclose lock-up terms in their registration documents, including the prospectus filed with the SEC.1U.S. Securities and Exchange Commission. Initial Public Offerings: Lockup Agreements To see who signed, how long the restriction runs, what exceptions exist, and whether any early-release provisions apply, pull the S-1 registration statement from the SEC’s EDGAR database. The terms are usually in the “Shares Eligible for Future Sale” section of the prospectus. The company’s shareholder relations department can also answer specific questions.

What Breaking a Lock-Up Costs

Because a lock-up is a private contract rather than an SEC rule, violations are handled as contract breaches, not enforcement actions. Intentional breaches are still extremely rare, because the practical consequences are severe.

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 can face 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 fallout tends to be worse. An insider known for breaking a lock-up will have a hard time attracting future investors, board seats, or business partners.