IPO Lockup Expiry

When a company IPOs, the underwriters typically require insiders — founders, employees, and venture capital backers — to sign an agreement not to sell any shares for a fixed period, usually 90 to 180 days. This exists to stop insiders from dumping shares straight into a hot IPO market and undermining confidence in the deal. But it also means a huge block of shares, often several times the freely tradable float, is sitting frozen with a known release date. When that date arrives, everyone who wanted out gets to sell at once.

Why the price tends to drop

Before lockup expiry, only the shares sold in the IPO itself are free to trade — often a small fraction of the company. After expiry, insiders who have been waiting months (sometimes years, if they're early venture investors) to realize a return can finally sell. Not all of them do, and not all at once, but even a modest fraction selling into a market that wasn't pricing in that supply moves the stock. The effect tends to be larger for companies where insiders hold an unusually large share of the company relative to the IPO float, and smaller for companies with strong post-IPO fundamentals that keep attracting new buyers to absorb the supply.

Worked example

A company IPO'd 5% of its shares six months ago; the remaining 95% is held by insiders under a 180-day lockup. The stock has traded steadily at $40. Analysts estimate that roughly 10% of the newly unlocked shares will be sold in the two weeks following expiry — still a share count nearly double the entire prior float.

A trader who tracks the lockup calendar can position ahead of the date: shorting into the anticipated supply, or simply avoiding new long positions until the expiry has passed and the stock has absorbed the selling. If the stock drops from $40 to $36 (a 10% move) as the supply clears and then stabilizes, the anticipatory short captures the drop that a trader unaware of the calendar would have been surprised by.

What this means in practice

Lockup dates are disclosed in the IPO prospectus, so this isn't insider information — it's a calendar exercise. The edge comes from estimating how much of the unlocked float will actually be sold, which depends on who's holding it (employees needing liquidity sell more readily than long-term VC funds) and how the stock has performed since IPO.