What it is: A lock-up period is a specific duration following an initial public offering (IPO) during which certain shareholders, including founders, employees, and significant stakeholders, are restricted from selling their shares. This period helps stabilize the stock price and maintain market confidence.
Why it is important: Lock-up periods prevent early shareholders from flooding the market with shares immediately after an IPO, which could significantly decrease stock price and market volatility. By restricting share sales for a specific time, lock-up periods create a more controlled environment for trading and provide stability for the newly public company.
Formulas: There are no specific formulas associated with lock-up periods.
How to use it in the context of startups: Startups going public through an IPO need to be aware of lock-up periods. Understanding the duration and restrictions of the lock-up period helps startups manage their shareholder base, plan for future share sales, and ensure a smoother transition to becoming a publicly traded company.
