Learn what happens during IPO lock-ups and blackouts, frequently asked questions, how to make a plan, and best practices as a tech employee.
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.
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.
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.
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:
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:
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.
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.
The information provided herein is for general informational purposes only and is not intended to provide tax, legal, or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security by Candor, its employees and affiliates, or any third-party. Any expressions of opinion or assumptions are for illustrative purposes only and are subject to change without notice. Past performance is not a guarantee of future results and the opinions presented herein should not be viewed as an indicator of future performance. Investing in securities involves risk. Loss of principal is possible.
Third-party data has been obtained from sources we believe to be reliable; however, its accuracy, completeness, or reliability cannot be guaranteed. Candor does not receive compensation to promote or discuss any particular Company; however, Candor, its employees and affiliates, and/or its clients may hold positions in securities of the Companies discussed.