How to Navigate IPO Lock-ups and Blackouts

As a tech employee at a pre-IPO company, if your company goes public in an IPO, company regulations will prohibit you from selling your shares right away. This process is called a lock-up period, and it can be a potentially fraught time for employees to navigate. Even once this period ends, there will be periodic blackouts that prevent you from selling your shares as well.

This dynamic is also complicated by the fact that many startups, especially in Silicon Valley, will compensate their employees with equity options or restricted trading units.

This article will explain the rules of lock-up and blackout periods for tech employees during an IPO, common questions, and best practices for navigating this potentially difficult period.

What happens to employees during IPO lock-ups and blackouts?

Lock-ups

First, a definition... IPO stands for initial public offering. It is the process of offering the shares of a private corporation to the public in a new stock issuance, raising capital from public investors.

Pre-IPO companies have fewer shareholders, most of them venture capitalists or angel investors, and when they “go public” with an IPO, that means anyone can invest. However, there are many rules and guidelines around going public, including rules that govern when founders, executives, and employees of these companies can buy and sell company shares.

When a company goes public, its underwriters and new issuers make company insiders, including employees, sign a lock-up agreement that prohibits them from selling any pre-owned shares for a specified period of time when a company goes public. This period typically ranges from 90 to 180 days, depending on the company, though it can be longer.

Lock-up periods are put in place to prevent high-volume selling immediately after a company goes public where employees could potentially flood the stock market by exercising their contracts. They help show that the company has strong, intact leadership with its business model on a solid footing.

This doesn’t prevent problems entirely, however. Lock-up periods delay insider selling, but sometimes when the lock-up expires, the stock price can plummet when a rush of insiders try to sell their stock at the same time.

Blackouts

Even after lock-up periods expire, a company will still have blackout periods where insiders with access to material nonpublic information are prohibited from buying and selling stock. These periods typically occur four times a year, just before a company’s quarterly earnings reports are released. These periods can last from 30 to 60 days, leaving small windows where employees can trade stocks.

If you are an employee in possession of material nonpublic information, you can set up a Rule 10b5-1 plan to make sure you’re in compliance with SEC regulations.

IPO lock-up and blackout FAQ

Lock-ups and blackouts can be stressful for employees, but these periods of time can also be exciting because after they end, you have the potential to make a lot of money.

Here are some questions that you might have about how lock-up periods will affect you as an employee:

• Why lock-up periods? Though lock-up periods can be inconvenient for individual employees, they exist in order to help the share price of the company remain stable, avoid insider trading with material nonpublic information, and help a company retain a positive public-facing image.
• What is a vesting period? A vesting period refers to the time an employee must work for a company before they can own outright employee stock options. For a company going public, the value of the stock usually increases during the time. At the end of the vesting period, employees are allowed to sell their stock.
• What happens when a company offers stock options before it goes public? If stock options vest before the IPO, employees will have to wait until the period is over before they can exercise their stock options. However, if stocks don’t vest until after the lock-up ends, then it won’t affect an employee’s ability to buy and sell stock.
• Why are employees compensated with stock options? A company wants to align its employees’ incentives with their own to make sure their employees are invested in the future of the company and want it to increase in value on the stock market.
• Are lock-up and blackout periods different lengths different for different people? Yes. Oftentimes, employees’ blackout periods are a different length of time than executives or founders. Check with your company to see what applies to you.
• Will I always make money when the lock-up period ends? No, it’s actually very common for company stock to dip when the lock-up period ends. Although IPOs can be extremely successful, it’s a volatile market and you should make sure expectations aren’t sky-high. It may take time for your investments to pay off.

Make a plan for IPO lock-ups and blackouts

If you work or have worked for a company about to go public, it’s important to make a plan early. Here are some important tips for financial planning:

• Have the paperwork. Before the lock-up period ends, make sure you have and understand all of the proper documentation for buying and selling stock. This might include stock plan documents, grant agreements, key dates, and other important financial information.
• Find out when you can sell. Figure out how long your company’s lock-up period will last. If you currently work for a company, they should communicate this to you, but if you’re a former employee, you need to figure out how the lock-up period applies to you. The company may alert you, or you may need to look at SEC filings.
• Plan for reduced liquidity. Since you can’t sell your shares for the duration of the lock-up period, that part of your compensation will be illiquid until the period ends.
• Develop a strategy. Work with your financial advisors to figure out an investment strategy that works with your portfolio before the period ends. Consider your risk tolerance and decide how to exercise your stock options based on your individual portfolio.

Best practices

IPO lock-ups and blackouts can be confusing even when the process goes smoothly. You can follow these best practices to avoid panic and make sure you’re complying with your company’s regulations.

Anticipate a drop: It’s very common for a company’s stock price to drop, either in anticipation that locked up shares will be sold into the market when the lock-up period ends, or when the period does end and a flood of shares are sold into the market.

Understand insider trading: As an employee of a company, you are an insider who may know some amount of material nonpublic information (MNPI). Make sure you are complying with SEC regulations to avoid allegations of insider trading. You can read more about insider trading on Candor here.

Expect blackout periods to continue: Even after the initial lock-up period expires, blackout periods will continue to be a feature of your public company, as the SEC requires that public companies disclose information including earnings reports. Blackout periods will prevent you from trading in the lead-up to the release of that information, so make a plan now to comply with trading rules.

Don’t pre-spend. Going public can be a volatile, uncertain process. Try not to rely on the idea of accumulating wealth in the near future, and don’t spend money that you don’t yet have, because going public might not be the boon you hope it will be.

Use your company’s resources: See if your company provides a comprehensive education program around going public and the lock-up and blackout periods that go along with that. If your company offers it, it can be an important resource to make sure you know exactly how your company fits into the grand scheme of IPOs and the specificities of your process.

Get financial advice: The process of your company going public can be difficult to navigate on your own. Seek out expert advice from financial planners and analysts to reduce stress and make sure you’re on the right path that will benefit both your individual stock portfolio and your company.

Takeaways

IPOs can be difficult to navigate, and lock-ups and blackouts add extra stress for employees who want to sell their shares. Remember to stay calm, and focus on making a plan for when the lock-up period ends. Plan on there being blackout periods each year where you will go through a similar process of not being able to sell or buy shares. Talk to your financial advisors and think about how to use this opportunity to boost your stock portfolio when the time comes.