What is a lock-up period?
A lock-up period is a period of time where investors are forbidden from selling their shares after an initial public offering. It's a way of avoiding liquidity and upsetting the price of shares in that company.
Where have you heard about lock-up periods?
Lock-up periods are standard practice for any company when it's first set up. Early investors and employees are given the terms of the lock-up period in a contract.
What you need to know about lock-up periods.
The average lock-up period is somewhere between 90 and 180 days. After that, a shareholder can exercise the option to sell their shares and cash in the money. Lock-ups occur after an initial public offering – the first time the public gets the opportunity to invest in a private company.
The main purpose of a lock-up is to avoid shareholders – pre-IPO investors and employees – flooding the market. If that happens, share prices go down and affect other shareholders' positions. Lock-ups allow companies to adjust to the market and provide an opportunity to establish earnings reports for future investors to access.
Find out more about lock-up periods.
Lock-up periods are often one of the conditions of exercising an employee stock option. Read our guide to options here.