When a company lists on the stock market, its founders, early investors and staff usually cannot sell their shares straight away. They are bound by a lock-up period. The day that restriction ends can be one of the most important dates in a young listed company’s calendar, because a wave of new sellers may suddenly be allowed into the market.
What a lock-up is
A lock-up is a contractual agreement, usually between the company’s existing shareholders and the banks managing the initial public offering. It bars insiders from selling, or sometimes even pledging, their shares for a set period after listing.
In the US, lock-ups commonly last 180 days. In the UK and Europe, periods of 180 or 365 days are typical, sometimes with different terms for founders and other investors. Some agreements allow early release if the share price stays well above the IPO price for a set time.
Why lock-ups exist
The aim is to give the new shares time to settle. If founders and venture capital funds could sell on day one, the market might be flooded with stock, driving the price down and hurting the new investors who bought in the offering. A lock-up reassures buyers that the people who know the business best are staying in, at least for a while.
What happens at expiry
When the lock-up ends, a large number of shares can become available to trade. If insiders sell heavily, the extra supply can push the price down. Academic studies of US IPOs have found that shares tend to dip around lock-up expiry, with the average move negative in the days before and after.
The size of the effect depends on several factors. The bigger the share of the company held by locked-up insiders compared with the existing free float, the larger the potential overhang. Shares that have risen far above the IPO price give early investors a strong reason to take profits. Venture capital and private equity funds often need to return cash to their own investors, which makes selling more likely.
Why it is not always a sell-off
Markets usually know the expiry date in advance, as it is disclosed in the IPO prospectus. Some of the expected selling may already be reflected in the price. Insiders may also sell gradually rather than all at once, or sell through an organised placing to institutional investors at a small discount, which can limit disruption on the open market.
In some cases, the end of a lock-up can even help, by increasing the number of shares available and making the stock eligible for more indices or easier to trade for large funds.
How traders prepare
Traders who follow recent listings track lock-up dates closely. Useful questions include how many shares are being released, who holds them and how far the price is above the IPO level. Announcements of secondary placings, director dealings and changes in short interest around the date can offer clues.
Volatility often rises around expiry, so position sizes and stop placement deserve extra care. Some traders avoid opening new positions in the days just before a large release.
Common beginner mistakes
The first is not knowing the date at all, then being surprised when the share price drops. The second is assuming expiry always means a crash, when the outcome depends on the size and holders of the locked shares. The third is ignoring dilution from staff share schemes that may vest around the same time.
Putting it together
Lock-up expiries are scheduled supply events. They do not guarantee a fall, but they shift the balance between buyers and sellers in a way that is worth planning around.
Our assessment is that lock-up dates deserve a place in any trader’s calendar for recently listed shares, especially where insiders hold a large stake and the price has risen sharply since listing. The signals to watch are placing announcements and director dealings near expiry. A modest release held by long-term founders would lower the concern considerably. If you want to understand how you plan around scheduled events and manage risk, our free trader assessment is a good next step.
