What Does Lockup Period Mean?
The lockup period is the time frame in which investors, employees and corporate insiders cannot sell their shares following an initial public offering. This commonly happens when a private company offers its first stock issuance in order to become a publicly traded corporation.
Divestopedia Explains Lockup Period
The lockup period begins on the first day of the initial public offering and lasts from 90 to 180 days, depending on the company's lockup agreement. A lockup period is part of the conditions of employee stock options. The lead underwriter confirms the stock options agreement prior to the initial public offering. This prohibits employees from selling their shares right after the IPO, which would increase shares in the market and drive down the share price. The lockup also protects large shareholders from selling their shares, which outsiders may view as an indicator of a lack of confidence in the company. Though the lockup is in effect, it does not mean that the stock does not trade as it only restricts shareholders that are limited to the lockup.
If a private company is acquired by a public company and receives share consideration, the vendor is usually subject to a lockup period where they will be restricted from selling their shares for a period of time up to two years. The reason for the lockup is twofold; 1) the share consideration offered might be a large amount of the total outstanding shares and may depress the price of the shares if sold all at once, 2) the purchaser usually would still like the cooperation of the vendor to transition and integrate the newly acquired company.