Glossary - Lock-up Agreement
A lock-up agreement is a contractual provision preventing insiders of a company from selling their shares for a specified period of time. They are commonly used in initial public offerings (IPOs) to ensure market stability by preventing a flood of shares from hitting the market immediately after the company goes public. These agreements can also be found in other contexts, such as private financing rounds, to align the interests of the founders and investors by restricting the sale of equity.
Also known as
- Lock-In Agreement
- Share Lock-Up
Use cases examples
- Initial Public Offering (IPO) Prospectus: Following the completion of this offering, all of our directors, executive officers, and certain shareholders have entered into lock-up agreements with the underwriters, agreeing not to sell, transfer, or dispose of, directly or indirectly, any of our common stock or securities convertible into or exchangeable or exercisable for any of our common stock for a period of 180 days after the date of this prospectus without the prior written consent of the underwriters.
- Private Financing Agreement: The investors and founders hereby agree that they will not, during the period commencing on the date hereof and ending on the first anniversary of the date hereof, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the capital stock of the Company or any securities convertible into or exercisable or exchangeable for capital stock without the prior written consent of the majority of the board of directors of the Company.
Considerations for investors
- Investors should assess the length of the lock-up period to ensure it aligns with their liquidity needs and investment strategy.
- It's important for investors to understand the exceptions to lock-up agreements that might allow insiders to sell shares under certain conditions, as this could affect the stock's market price.
Considerations for founders
- Understanding the duration of lock-up periods and negotiating terms that allow for some flexibility can be crucial for personal financial planning.
- Founders should consider the potential impact of lock-up agreements on their ability to leverage their equity for loans or other financial needs during the restricted period.
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