Startups or private firms are typically owned by founders, venture capitalists, and investors. They make their companies public for two main reasons. The first goal is to raise capital to expand the company, and another is that they want to regain a portion of their initial investment. Even though newly listed companies determine how many shares to issue, it is not unusual for founders or early investors to keep significant stakes in the company after it goes public. If one or more investors opt to sell a significant portion of their shares, the share price may fall significantly, which is not in the company's or its investors' best interests. As a result, current investors are often restricted from selling their stocks for a specific amount of time, which is called IPO lock up.

What Is An IPO Lock-up? 

An IPO lock-up is a time, often 90 to 180 days, following an IPO during which company insiders are not allowed to sell shares. Lock-up periods usually apply to insiders such as the founder of the company, owner, manager, and employees, but shareholders such as venture capitalists may also be under this restriction. An IPO lock-up period is intended to prevent insiders from overloading the market with huge shares when the company goes public, which might lower the stock's price initially.

The Purpose Of IPO Lock-Up 

An IPO lock-up aims to avoid the condition when the market is overloaded with a large portion of a company's share supply too early after it goes public. Only 20% of a company's share is typically issued to the public first. If a  single major shareholder intends to dispose of all of their shares in the initial few days of trade, it may lead the stock to fall, affecting all shareholders. According to an empirical study, stock values face a lasting decrease of roughly 1% to 3% once the lock-up period ends.

IPO lock-up periods help recently issued shares to stabilise without being exposed to selling pressures from stakeholders or insiders of the company. During this cooling-off phase, the market gets time to set the price of the shares based on the natural supply and demand. Liquidity may be limited initially, but it will gradually rise when a trading range is established.

Expiration of IPO Lock-up 

As the lock-up expiry date approaches, traders frequently expect a price reduction due to the increased number of shares accessible to the market. The expectation of a price decline may increase traders' interest in selling shares before it expires. Investors may try to protect their long holdings if they are worried about the approaching lock-up expiry.

While shares tend to fall before a lock-up expiry, the selling pressure does not always continue. If the pre-expiry sell-off is intense, it can sometimes result in a correction on expiration day as short-sellers attempt to cover existing shares to preserve profits or reduce losses.

Why Does IPO Lock-up Matter To You?

If we assess the data, there is no obvious pattern in stock performance after the lock-up period ends. Still, we typically notice selling pressure around the completion of the IPO lock-up period. For example, SBI Cards and Payment Services dropped 15% on the day following the lock-up periods. With this drop to Rs 505, SBI Cards shares have dropped 30% from their issue price of Rs 755 per share. One noteworthy discovery is that the low price on the first day of trading following the lock-up period may provide significant support for a further recovery in value stocks. If the fundamentals are strong, such declines are an excellent investment opportunity. It is not just a barrier to investment but also a possibility for new investors to expand.

Trading Professionals Can Help Sell Shares Post IPO Lock-up 

If you are no longer employed by the firm and are not an insider, you will often have more options for selling a large stock investment over time. Suppose you were an insider of NSE India Limited and held its unlisted shares, and now you are planning to sell your ESOP or pre-IPO stock of the company. Consider hiring a financial expert to assist you with this procedure. You may be able to arrange a strategy to capture the gain over time while potentially reducing your loss by employing multiple trading techniques.

Working with a professional stock trader is strongly recommended because these trading tactics are complex and challenging. Consider getting the assistance of financial experts to avoid any severe tax or financial blunders. For example, if you possess qualifying small company shares but haven't satisfied the five-year holding requirement, going into an options contract could invalidate your stock for possible tax concession. 

Stockify is an online platform with a pool of qualified stock and financial experts. Here you can buy unlisted shares or sell ESOPs and opt for an alternative investment. The experts at Stockify will assist you in effective wealth management and guide you through successful stock investment. Moreover, it is a convenient place