Company lock-up agreements: Overview, definition, and example
What are company lock-up agreements?
A company lock-up agreement is a legal contract that restricts certain shareholders, such as company executives, insiders, or institutional investors, from selling or transferring their shares for a specific period following an initial public offering (IPO) or other major corporate event. The lock-up period is intended to prevent the market from being flooded with too many shares right after the IPO, which could cause a significant drop in the stock price. Lock-up agreements are commonly used to help stabilize the stock price after a company goes public.
For example, an IPO might come with a lock-up period of 90 days, during which insiders and major investors are prohibited from selling their shares to avoid destabilizing the stock price.
Why are company lock-up agreements important?
Company lock-up agreements are important because they provide market stability after a company goes public. By restricting the sale of shares for a set period, these agreements help prevent a sudden sell-off that could lower the stock's price and harm the company's reputation or financial health. Lock-up agreements give the market time to assess the company's performance and value without the pressure of a flood of shares being sold by insiders. For businesses, the lock-up period also helps ensure that executives and insiders remain committed to the company’s long-term success.
For investors, the lock-up agreement ensures that the company’s stock remains relatively stable in the short term, which can provide confidence in the company’s post-IPO growth.
Understanding company lock-up agreements through an example
Imagine a technology company, TechInnovate, goes public through an IPO, offering shares at $20 each. The IPO includes a 180-day lock-up period, during which company executives and early investors, such as venture capitalists, cannot sell their shares. This helps prevent an excessive sell-off of shares after the IPO, ensuring that the stock price doesn’t plummet due to an oversupply. After the lock-up period ends, executives and early investors are free to sell their shares, but by then, the stock price has had time to stabilize and grow.
In another example, a startup, GreenTech Solutions, has recently completed an IPO, with shares priced at $15 each. As part of the lock-up agreement, the company’s insiders agree to a six-month restriction on selling their shares. The goal is to protect the market from too much selling too soon, allowing time for investors to see the company’s performance and gain confidence in its future prospects.
An example of a "company lock-up agreement" clause
Here’s how a clause like this might appear in a contract:
“The Shareholders agree not to sell, transfer, or otherwise dispose of any shares of the Company for a period of [insert number] days following the completion of the Initial Public Offering (IPO), except as permitted by the Underwriters or with the prior written consent of the Company.”
Conclusion
Company lock-up agreements are crucial for maintaining market stability after a company goes public. By restricting the sale of shares by insiders and major investors for a specified period, these agreements prevent a sudden influx of stock that could lead to a dramatic drop in price. For businesses, lock-up agreements help stabilize the stock price and provide a solid foundation for long-term growth. For investors, these agreements offer reassurance that the stock won’t be overwhelmed by a massive sell-off in the early days of trading.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.