A lock-up agreement is a binding contract that restricts shareholders from selling their equity during a defined period, usually following an Initial Public Offering (IPO) or acquisition. Designed to stabilize stock prices and maintain investor confidence, lock-ups prevent founders, employees, and early investors like angels from flooding the market with shares immediately after going public. Standard lock-up periods last 180 days, though some extend to 360 days or longer.
How It Works
When a company prepares for an IPO, underwriters typically require lock-up agreements from all significant shareholders. These agreements legally bind signers to hold their shares and not sell during the restricted period. After the lock-up expires, shares become tradeable without restriction. The agreement applies regardless of stock performance—even if prices soar, locked-up shareholders cannot capitalize immediately. Some agreements include "piggyback registration" clauses allowing limited sales under specific conditions.
Why It Matters for Investors
As an angel investor, lock-up agreements directly impact your liquidity timeline and exit strategy. You must plan for the restricted holding period when evaluating investment opportunities, as your capital remains illiquid despite the company going public. Understanding lock-up terms helps you assess true exit timing and manage expectations. Additionally, when lock-ups expire, watch for potential price pressure as large share blocks hit the market—this creates both risks and opportunities for strategic selling.
Example
You invest $100,000 in an early-stage startup at a $2M valuation, receiving 5% equity. Three years later, the company IPOs at a $200M valuation, making your stake worth $10M on paper. However, you signed a 180-day lock-up agreement. For six months, you cannot sell a single share despite the dramatic value increase. On day 181, the lock-up expires and you can execute your exit strategy—either gradually selling to avoid market impact or executing your full exit based on market conditions.
Key Takeaways
- Lock-up agreements restrict share sales for 180-360 days post-IPO, protecting market stability and limiting insider selling pressure
- Plan your investment timeline knowing you cannot access liquidity immediately upon public listing, even with successful exits
- Monitor lock-up expiration dates closely, as share price typically experiences pressure when large blocks become tradeable
- Review lock-up terms during term sheet negotiations and understand any exceptions or piggyback provisions that may apply to your position