An IPO is one of the most exciting days for founders, employees, and early investors of startup companies. What used to be a small company with a strange name and a crazy idea becomes a large company with a household name and an idea that everyone wants a piece of. It is also the day when all that hard-earned sweat equity which had previously been recognized with potentially worthless stock options and RSUs becomes valuable and marketable equity in a publicly traded company…well almost marketable!
While not required by the SEC, almost every company going public subjects employees, former employees, and other insiders to a lockup period (often 180 days) during which they are not allowed to sell their stock. The reason the lockup period exists is that typically only a small portion of outstanding shares are sold during an IPO and insiders continue to own the majority of stock. If all those insiders decided they wanted to sell right after the IPO it could put downward pressure on the stock price of the newly public company. Since the underwriters (investment banks) assume the risk of buying the IPO stock and then resell it to the public they want to ensure the market is not going to be flooded right away and thus require the company to “lockup” the shares of insiders for a certain period of time, known as the lockup period.