Lock-up agreements prohibit company insiders (founders, directors, executive officers and major stockholders) and other pre-IPO stockholders from selling their shares for a period of time after an offering. Lock-ups are required in initial public offerings (IPOs), as well as most follow-on offerings, to foster a predictable and stable post-offering market. The theory is that, without lock-ups, existing stockholders could sell their shares shortly after the offering, potentially oversupplying the market with shares, depressing the share price and impairing the underwriters’ ability to stabilize – all of which can ultimately hurt the issuer and its investors. Potential IPO investors don’t like to see company insiders seeking immediate liquidity for their shares, as that could signify that these insiders don’t have much confidence in the company’s future performance.
Variations on a theme
Traditionally, lock-up periods were almost always 180 days for IPOs. In recent years, amid strong investor demand for new issuances by sought-after tech companies and a desire to allow company insiders – particularly employees – to gain liquidity earlier or avoid a functionally extended lock-up period if the 180th day falls during a company trading blackout window (or perhaps simply some FOMO around direct listings, which generally eschew lock-ups), we’ve seen a number of tech IPOs find creative and complex ways to determine how and when locked-up shares could be released before the traditional 180 days. These creative lock-up structures may include a number of formulations, or a combination of such formulations, which we discuss below.
Shortened lock-up period
While 180 days post-pricing is still the standard for IPOs, some issuers have determined that an earlier date makes sense in light of the timing of the deal, the public float and liquidity goals, and have implemented a hard-wired lock-up end date of fewer than 180 days. For very high-valuation issuers, the immediate public float may be relatively low at the IPO (e.g., less than 8 –10%), so there is a desire to get more shares into the market earlier. We typically see these shortened expirations occur after the second earnings release after IPO, so long as that falls at least 120 days post-pricing. Some examples are Reddit, Airbnb, OneStream and Wish, which each had shortened lock-ups that expired after the second earnings release. These earlier set release dates are often designed to address the need for more liquidity as the issuer matures as a public company, or because the conventional 180 days would result in poor expiration timing for employees (which resulted in the “blackout pull forward” discussed below).
Blackout pull forward
We can’t be entirely sure who invented this, but it would be weird and overly humble to assume we didn’t. A pervasive reality of newly public companies is that their quarterly blackout periods (some reasonable time before the next earnings announcement when you have a very good sense, internally, of how the quarter is shaping up) often prevent insiders and employees from selling immediately after lock-up expiration. This can be exacerbated if the quarterly blackout for a particular issuer covers a broad swath of employees (or, in many cases, all employees), a prominent feature among tech companies that employ cultures of internal transparency. This can turn a 180-day lock-up into something much longer, certainly for insiders and potentially for the full employee base. As a result, many IPO companies seek a “blackout pull forward,” such that the lock-up expires some number of trading days prior to the start of the blackout period that would otherwise cover the expiration date, so long as the total lock-up period met a minimum number of days – usually 120 to 150 days. This clever provision makes sure that employees, directors and their affiliated entities that are subject to a company’s insider trading policy are not disadvantaged as compared to outside investors by tying the lock-up release to a moment in time where the “window” under such policy is open for trading. This has been a common feature in IPOs by tech companies, such as Snap, Peloton, Lyft and Pinterest.
Staggered early release
It has long been axiomatic that a company takes a stock price hit at lock-up expiration – the market realizing that far more shares will become available for sale, a glut of supply. Even though lock-up expirations are disclosed and predictable, they can still result in material downward pricing pressure at the lock-up expiration date as a result of so many shares becoming freely tradeable in the market. As a result, some companies look to staggered releases, often for different groups of shareholders, tied to specified dates and/or earnings releases to increase public float in a more coordinated and less dramatic way. This was the approach taken by, for example, Snowflake (25% released after 91 days), Doordash (40% released after 91 days), Braze (20% released after 50 days) and Toast (15% released after the first earnings release). While staggered releases are expected to give a company more control over the supply of its shares into the market by releasing them in smaller increments meant to avoid the big “dip” in stock price common at lock-up expiration date, in some instances, they have caused multiple, smaller dips at each staggered release date. Staggered releases may also facilitate tax planning for employees with vesting restricted stock units (RSUs) that require tax withholding payments while simultaneously mitigating the risk of high sales volume when all shares become available for sale at once. These releases also sometimes have performance-based thresholds, as discussed below.
Performance-based early release
The point of lock-ups is to avoid sales that put downward pressure on the stock in the aftermarket and create price volatility, so it was no surprise in a 10-year bull market that companies requested performance-based early releases, which are a variation of staggered early releases, in which a specified percentage of locked-up shares is released upon achievement of a specified stock price threshold. Companies like Datadog, Instacart, Klaviyo and C3.ai, among others, have included performance-based thresholds, and all of the most recent (2024) IPOs with staggered releases have included a performance condition (including Rubrik, Astera and Tempus AI). These types of early releases have become increasingly bespoke in the last several years, a seeming choose-your-own-adventure in terms of share price threshold (anywhere from 20% to 50% above the IPO price), timing conditions (typically, 10 days of any 15-day period) and the number of shares released if the company hits the relevant share price (anywhere from 10% to 35% of the total shares plus vested equity awards).
Some issuers require that this performance threshold be met only after 90 days have passed (which would allow “affiliates” – typically directors, executive officers and their affiliated entities – to participate in the release). Others agree to performance-based releases only for specific groups of holders (typically, nonexecutive employees). Performance-based early releases may be staggered with varying percentages of share releases tied to specified tiered price targets (see, e.g., Freshworks), but the overall premise is that if the stock appreciates meaningfully after IPO, releasing more shares into the market is a positive and addresses market demand. Plus, employees love this and want to/should benefit from the market’s excitement over the stock. Notably, this also ensures a price buffer to withstand downward selling pressure following the early release.
Day-one release
Sort of like the time-based early release discussed above, but on steroids, “day-one” lock-up releases permit nonexecutive employees to sell their shares from the first trading day of the company’s stock. Allbirds and Unity Software are two examples using this structure, each allowing their employees to sell up to 15% of their shares immediately upon listing. Additional tech companies followed suit – see, for example, Airbnb, Olo, Applovin, Robinhood and Confluent – in each case allowing employees (but not executive officers or directors) to sell on day one.
Due to securities law limitations on resales shortly following an IPO (namely, the interplay between Rule 144, Rule 701 and the requirements for the use of Form S-8), executive officers, directors and other affiliates generally cannot sell securities in the open market (outside of a registered offering, such as pursuant to a resale S-8, which can only register equity plan securities) in the first 90 days post-listing, and lock-up agreements typically take into account this restriction. As such, these sub-90-day early releases have generally applied only to nonexecutive employees.
For many of the companies that have had day-one releases, the valuation was so high at IPO that the public float (i.e., shares sold in the IPO) was relatively small, meaning that immediately releasing shares into the market on day one could actually decrease volatility by meeting buy-side demand in the aftermarket. While we at Cooley believe the markets are rebounding, we don’t expect to see nearly as many “day-one releases” for a while, given concerns about market reception and volatility, although we note that Cava, which went public in June 2023, had a day-one lock-up release for nonexecutive employees with respect to 20% of their shares. A day-one release also more broadly impacts overall deal timing, as a deal with a day-one release must list in an open trading window since employees can only sell shares during open trading windows.
Day-one releases are also more logistically complicated and take substantially more lead time to facilitate with a company’s equity administration platform/broker and transfer agent, in order to ensure shares are ready for trading as soon as trading commences on day one. In light of the US Supreme Court Slack direct listing decision, a day-one lock-up release could also potentially be helpful from a securities litigation defense standpoint, as it makes it difficult for purchasers to trace shares back to the S-1, which could frustrate a Section 11 claim. The Supreme Court in Slack did not answer the question regarding whether the ruling applies to claims under Section 12, so that remains an open question (although Section 11 carries strict liability, whereas Section 12(a)(2) does not), and the Supreme Court decision does not have any impact on Rule 10b-5 claims. The argument of nontraceability may be stronger if you have a larger number of open-market sales of nonregistered shares on day one, as compared to the number of registered share sales on the S-1.
The carrot
Some companies, such as UiPath and Coupang, have used early lock-up releases as a “carrot” to incentivize selling stockholders to sell in the IPO in order to obtain sufficient public float for the offering by permitting stockholders to sell in an early lock-up release if they agree to be selling stockholders. Some have also included tiered release percentages depending on the volume of shares that a selling stockholder agreed to sell in the IPO.
Structuring: Initial considerations
Map deal timing against blackout windows
Before delving into the various alternatives above, companies first need to map their potential deal timing against trading blackout windows to figure out the art of the possible for structuring lock-up terms, since insiders can only sell during open trading windows under the company’s insider trading policy. This will also help companies determine whether they want to implement a blackout pull forward structure.
What can legally be sold under securities laws
Next, companies need to carefully consider the securities restrictions overlay. There are restrictions governing which securities (outstanding common stock and common stock underlying vested equity awards) can actually be sold at any given time under the securities laws, particularly during the 180-day period following an IPO. In general, any person or entity that is not an “affiliate” of the issuer may freely sell shares that have been held for at least one year prior to the sale. Affiliates would need to wait at least 90 days post-IPO and comply with additional limitations.
An alternative for stockholders holding common stock received upon exercise, vesting and/or settlement of underlying equity awards is to sell pursuant to a resale registration statement on Form S-8, filed by the company at or following the IPO. However, this resale registration statement also comes with limitations on exactly which securities may be registered for resale. The brokerage firms that typically serve as equity administrators facilitating lock-up release sales also impose procedures and hurdles – and sometimes limitations – on the timing and volume of lock-up release sales, whether pursuant to a resale S-8 or otherwise, and have varying levels of technological ability and risk tolerance to facilitate different structures of early lock-up releases.
Who to include
Companies also need to consider which groups of stockholders they want to include in any early release (current employees, former employees, consultants, directors, officers, etc.), along with the ramifications and internal and external perceptions of each. For example, inclusion of directors and executive officers in any early lock-up release has at times been met with increased investor scrutiny and dissatisfaction.
Measurement date for determining securities eligible to be sold
Further, companies will need to determine which shares held outright or underlying equity securities are vested and eligible to be sold, and as of what measurement date to make that determination. For example, it is common to pick a measurement date that falls on the quarterly or monthly vesting date immediately preceding the IPO, but at a minimum, companies should pick a measurement date that is far enough in advance of the lock-up release date that it will allow sufficient lead time for determining eligible shares and getting them teed up with the transfer agent and equity administrator/broker for sale.
For companies with RSUs vesting and settling at IPO, upon satisfaction of the liquidity event-based vesting condition, this means the percentage of equity for eligible stockholders released would be calculated using the gross (pre-settlement) number of RSUs held. For any of these decisions, companies will also need to consider how to properly educate eligible stockholders, as well as how each decision may be perceived from a fairness perspective. If there is a staggered release with multiple releases before expiration, companies will also have to consider whether released shares remaining unsold in an initial release can later be sold in a second release, and whether the measurement date for determining shares eligible to be sold in the second release is prior to or after the first release (i.e., if after, the number of shares sold in the first release would impact the number of shares that could be sold in a second release).
Total quantum of shares to be sold during lock-up period
When the underwriters review early lock-up release structures for investor perception, they generally focus on the total quantum of shares that may potentially be released, together with any other expected sales of shares during the lock-up period, measured against the total post-IPO publicly traded float. Other expected sales typically include broker-assisted open-market sales of shares upon settlement of RSUs or stock options to satisfy withholding taxes. As such, companies should keep an estimation of such other expected sales in mind when considering the proposed percentage of equity securities eligible to be sold in an early lock-up release.
Logistical considerations
Acceleration of transfer agent and equity administrator processes
A number of logistical considerations will also impact early lock-up release structuring, as well as the process and timing for setting up and implementing an early lock-up release. In a typical 180-day lock-up scenario, IPO companies simply need to work with their transfer agent to transition their outstanding share capital to the transfer agent by 180 days post-IPO. In addition, companies will work with their equity administrators to ensure that post-IPO equity awards are set up on the administrators’ system by 180 days post-IPO. However, an early lock-up release necessitates acceleration of these items, as well as multiple additional steps among the company, transfer agent and equity administrator – and relatedly, requires the parties to begin the planning process as early as possible, often several months in advance of the first trading day post-IPO.
Administering which securities to be sold – automatic versus permitting choice
One major consideration is how to pick which shares underlying equity securities are eligible to be sold. For example, suppose a company wishes to early-release 20% of each employee’s vested equity securities – including shares held outright – from the lock-up. Should the company simply release 20% of each “tranche” of vested equity securities held by an employee (e.g., 20% of each stock option and RSU grant and 20% of shares held outright by cost basis)? The company could also allow each employee to select which equity securities to prioritize (e.g., equity securities that have the lowest cost basis). But this may be technically challenging depending on whether the particular equity administrator engaged can facilitate this level of choice and whether employees can be properly educated to pick their allocations and eventually execute trades. Ultimately, each method entails logistical hurdles as well as fairness considerations, meaning each company needs to assess its own circumstances regardless of prevailing market trends.
Coordination with equity administrator
It’s also critical for a company’s internal equity management team to coordinate closely and early with the equity administrator on a number of topics. For example, the equity team needs to deeply understand how early-release participants interface with the equity administrator’s systems for accessing equity records, executing trades, making tax elections and the like. Different equity administrators also offer companies varying levels of control over access to equity accounts. A common analysis is what level of access employees will have to their equity accounts during a quarterly trading blackout. Finally, the company’s equity team should work closely with the transfer agent and outside counsel to carefully plan how to record shares at the transfer agent upon IPO to ensure a seamless transfer of the shares to the equity administrator ahead of any early lock-up release. For example, it is typical for companies to deposit all eligible early lock-up shares into an “omnibus” account at the transfer agent. Ahead of the early lock-up release, the company can easily instruct the equity administrator to pull all shares from that omnibus account and place them into individual employee and/or former employee accounts that have been preset.
Interplay between lock-up releases and 10b5-1 plan adoption
In addition, as noted above, companies should also consider how any lock-up release dates (early or not) may intersect – not only with quarterly trading blackout dates under the company’s insider trading policy related to earnings releases, but also with the Securities and Exchange Commission’s latest adopted 10b5-1 rules. These rules implement mandatory “cooling-off” periods between adoption (or modification) of a trading plan under Rule 10b5-1 and when the first trade under the plan may occur. For directors and officers, the mandatory cooling-off period is the later of 90 days after adoption of a Rule 10b5-1 plan or two business days following the disclosure of the issuer’s financial results for the fiscal quarter in which the Rule 10b5-1 plan was adopted in a Form 10-Q or 10-K (not to exceed 120 days following plan adoption). For other individuals, the mandatory cooling-off period is 30 days after the adoption of a Rule 10b5-1 plan. Because trades cannot occur during these mandatory cooling-off periods, companies have to pay careful attention to the timing of implementation of any Rule 10b5-1 plans for directors and officers and others, so that lock-up release dates do not fall within any cooling-off periods wherein trades for such individuals will be prohibited even if not subject to a lock-up restriction.
Looking forward
Whether the flexible lock-up arrangement trend will be sustained remains to be seen, but our expectation is a slight reversion to the mean, with the exception of the blackout pull forward, which we expect is here to stay in cases where lock-up expirations fall within blackout periods. With the exception of the blackout pull forward, we have seen public institutional investors, along with pre-IPO institutional stockholders, express skepticism concerning creative lock-up provisions, and we expect this to continue at least until the markets are both open and frothy. For example, investors have been very focused on early lock-up release terms, including the size of the releases, as well as any contemplated director or executive officer participation. Pre-IPO investors have also been quite focused on the terms of existing market standoff rights under investors’ rights agreements, insisting on strict adherence to any “equal treatment” or “most favored nation” provisions in such agreements, as well as the interplay of any such rights with underwriter lock-up agreement terms, notwithstanding the fact that the underwriters are not parties to, and are not bound by, investors’ rights agreements. As such, companies may wish to socialize any early lock-up release structure with certain of their key investors, including those with designated directors on the company’s board of directors, to ensure early alignment and minimize disruptive changes while the company is attempting to execute on its IPO.
Ultimately, the type of lock-up arrangements that a particular company chooses is subject to its own set of circumstances, market conditions and investor sentiment, which may vary from case to case. Even preliminary decisions around early lock-up release structures involve a complicated analysis that requires close coordination among the company, lawyers, bankers and equity administrator to make sure companies are accomplishing their goals in light of legal parameters and balancing execution and marketing considerations.
