The year of the disappearing lock-up

That startup founders are in the driver’s seat has been plain for a while now. Consider the extent to which funding has soared, with investors reportedly plugging a record $93 billion into early-stage U.S. startups last year — triple what they raised five years earlier. Consider that the median valuation for seed- and early-stage startups doubled over the same period.

Consider also the continued rise of dual-class shares that provide founders with outsize voting power. Almost 30% of IPOs between 2017 and 2019 had dual-class structures, and that number likely increased between 2019 and the end of last year.

A less discussed proof point that underscores how far founders can currently push their investors — and eventually bankers — centers on lock-up periods. Typically a 90- to 180-day window after a company begins to trade publicly — time during which founders, investors and employees agree not to sell their shares to show their faith in the company and instill confidence in new shareholders — lock-ups are starting to disappear, and somewhat quickly. According to new research from Renaissance Capital, which manages IPO-focused exchange-traded funds, early lock-up provisions “exploded” last year.

By the numbers, fully one-quarter of the year’s IPOs (or 91 offers) had provisions that allowed for early lock-up releases. That’s more than five times the number in 2020. Unsurprisingly, tech IPOs accounted for 60 of the new issuers with early lock-up provisions, or 66% of the group.

You might recall reading at the time about some of these offerings, including that of Coupang and Robinhood. In the case of Coupang, South Korea’s biggest e-commerce retailer, it announced an early stock lockup agreement release for about 34 million shares just one week into its March debut on the NYSE based on a specific condition — that its stock needed to close at or above its IPO price of $35 — that was quickly satisfied. (The shares today trade at roughly $26 apiece.)

When Robinhood began trading at the end of July, employees were allowed to sell 15% of their holdings immediately and another 15% three months later.

Other companies to loosen lock-ups include Snowflake, the data warehousing company that went public in the fall of 2020 and allowed employees to sell as much as 25% of their vested stock three months afterward; Airbnb, which went public in December 2020 and allowed employees to sell up to 15% of their shares in its first seven trading days; and DoorDash, whose underwriters similarly agreed to cut in half the company’s 180-day lockup agreement for some shares after it also went public in December 2020.

Dutch Bros., Allbirds, The Honest Company, TuSimple and Affirm also featured early lock-up provisions, notes Renaissance’s report.

Lock-up periods have never been required by the Securities and Exchange Commission but were long considered a good faith sign to outsiders — and even helped some public market shareholders plan their stock purchases. (Often, a company’s shares will fall in price following a traditional lock-up as early investors unload their shares en masse, driving up the supply of available shares. When Uber’s lockup period ended in 2019, for example, its shares dropped to 43% below their IPO price as newly sold shares flooded the market.)

So what’s going on exactly? A number of trends have since conspired to whittle away such measures, from the longer stretch that many companies now operate as privately held concerns (creating greater demand for liquidity by insiders), to the advent of direct listings. Just one of 12 direct listings to date has featured a lockup, that of Palantir.

The rise last year of special purpose acquisition companies, or SPACs, is yet another factor. As The New York Times reported last spring, many related deals contain language that restricts sponsors from selling shares for a year from the day the deal is completed, but there are much faster ways out. According to one popular provision, if a SPAC’s shares trade slightly above their initial pricing for more than 20 days in a 30-day period, the lockup provision vanishes. Sometimes, the terms are even more porous. Indeed, when ride-hail giant Grab began to trade publicly last month following a tie-up with a blank-check company, more than 20% of shares held by company shareholders were immediately tradable after the merger.

The unifying thread here is that all involve founding teams who demanded, and received, more flexible lock-up terms from their investors, who also largely benefit from the trend. (What VC would prefer to have his or her hand’s tied for three to six months after a public offering?)

In the meantime, as Renaissance notes in its new report, lockups aren’t just fewer in number, but they’re becoming more difficult to track. As the report observes: “Instead of a simple reduction in lock-up days, early releases are now regularly based on earnings dates or blackout periods that are undetermined at the time of the IPO. The release date may also be a moving target, dependent upon the share price hitting a certain threshold (for example, once shares are 33% above the IPO for 10 out of 15 consecutive trading days).”

More, it adds, “Early releases are often buried in complex legalese, and may be vague regarding the actual number of shares released . . .”

The big question is whether public market shareholders care about the increasing disappearance of lock-up periods, and right now, there isn’t a strong case to make why they should. While SPACs have significantly underperformed typical IPOs, direct listings — perhaps because they are far fewer in number — have performed better.

As for the broader market, U.S. stocks enjoyed a record-setting year in 2021, so investors aren’t likely to push back on much until that changes. After that, all bets are off.