A lock-up is a feature of underwriting agreements for public stock offerings designed to protect the value of the stock for a period following the IPO. Lock up agreements generally prevent insiders from selling their stock in the 90-180 days following the offering. The rationale is that such a sale by insiders would be a negative signal to the market and hurt the stock’s price.
Q. In the news today because Groupon’s lockup period expires. But what are the basics of a lockup?
A. A lockup is an agreement between a company and its underwriters that is normal in an IPO. The idea is that the underwriters want to make sure that not everyone in the company dumps stock right after the offering, for obvious reasons; so the company agrees to “lock the stock up” and not permit its sale for a specific period of time. In my day, that period was a year; now, lockups tend to be much shorter. Much of the Facebook stock comes free in just 90 days, which is an amazingly short time.
Q. And today’s is the day that Groupon’s expires, right? So a bunch of shares are hitting the market?
A. A bunch can hit the market. Holders can sell or not. The average price on those locked up stock is just over a buck, so even though the shares are down by half from the IPO price, there’s still a lot of value for the average employee. But here’s a key practical point: Management has said it won’t sell, as a signal to the market.. Legally, the lockup might be just 180 days; but practically, it can almost infinite for senior management, because once you start selling the news gets out and the stock tanks.
Q. So, what’s this mean for an entrepreneur who is evaluation his option, between a sale to a strategic or going for an IPO?
A. It’s a great question. Look at Groupon. They turned down $6 billion in cash from Google 18 months ago. Today, the company does has a paper value of $6 billion, but that value cannot realistically be realized by the major holders… and, of course, they don’t hold the same %s as they did, since some has gone out to the public. Meantime, company has all sorts of challenges ahead, internally and externally, and is facing a very dicey overall stock market outlook.
Q. So, I guess all that means you’re in favor of the “bird in the hand” philosophy?
A. Well, if it’s a hummingbird, maybe not; but if its an eagle, yes. Turning down an attractive offer is really hard because even if your company does IPO you could be years away from an actual realization event. And given how rapidly things change these days, that necessarily means enormous risks to your personal economics. So forget the ego and vanity side of taking your company public, and take a hard look at when you’ll really be able to extract cash.