How Long Is an IPO Lock-Up Period, and What Should You Do While You Wait?

When the company you work for goes public, your capital goes from an intangible asset to one that has a publicly traded market price.

But even though your net worth fluctuates in real time, you can’t sell immediately. After an initial public offering, employees, executives, founders, and early investors are typically tied into a lock-up period of about 90 to 180 days that restricts them from selling all of their shares at once.

During that months-long waiting game, “you won’t be able to change anything when it comes to your company’s stock,” says Angela Moore, an Orlando, Florida-based certified financial planner at Fruitful.

As frustrating as it can be to wait — and have no idea what the stock’s price will be once you’re able to sell — this period can also be critical to your long-term financial planning. Use this time to understand your equity, assess taxes and risk, and decide which experts you’d like in your corner to help you through the process.

The IPO lock-up period is a restriction on company insiders and early shareholders to prevent them from trading their shares immediately after the IPO. Although the SEC does not mandate a lockup, companies often choose to impose one to give the stock a chance to stabilize in the market, as a large selloff can negatively impact the stock price. ⁽⁰⁾

No two lock-up periods are exactly the same and it’s usually written in the fine print when shares can be unlocked. SpaceX’s lockup, for example, issues shares in stages based on factors such as stock performance dates and targets until full issuance after 180 days. Elon Musk and other big investors have a longer lock-up of 366 days ⁽⁰⁾

Companies must disclose their lock-up terms in their registration documents, and you may receive more information and supplements closer to the IPO date. Read your company’s IPO prospectus, share plan documents, share plan portal and internal communications to determine details such as:

• The duration of your company’s lockout period

• Are there any early release triggers in place that could end the lockup early or allow the shares to be phased out

• Exceptions and exceptions for specific situations that allow you to sell shares during the lock-up period

An IPO is a big liquidity event because it’s when your company’s equity turns into cash that you can access. To make the most of this moment, advance preparation is crucial.

Depending on when you joined your company and the types of shares they have offered over time, you may have a variety of employee shares ranging from RSUs, ISOs, NSOs, ESPP shares, and common shares. For each type and stock, record important details such as vest date, exercise cost, appraised value, taxes and more. For a deeper introduction to the capital, we cover what to do with your shares when your company goes public.

When it comes to capital, Moore explains that she’s also concerned about the bigger picture.

“As a financial planner, (I would) know the broader scope,” she says. “Such as their current income, the state they live in, their tax rate and their overall tax situation. Many clients already have in mind what they plan to do with that money, so (I) also ask about their goals. … That kind of liquidity event requires a good planning conversation well in advance, as soon as possible.”

The main concern for employees before their company goes public is concentration risk: how much of their financial portfolio is tied to their company’s stock?

Moore gives a hypothetical example of a 30-year-old employee with $80,000 in savings, $150,000 in a diversified brokerage account and $600,000 in company stock.

“That means most of my money is in my company’s stock,” she says, “and that’s a significant risk because if I lost that $600,000, my entire financial situation would be completely different.”

For those trying to balance their risk tolerance and faith in their company’s future, Moore offers these questions as a starting point: If someone gave you two million dollars, would you feel uncomfortable buying stock in your company with all of it? Or would you do something else?

“That’s why planning is important because all these conversations have to happen,” she says. “How are we going to do that? How are we going to cover things? And everybody’s different.”

The potential windfall from an IPO could be enough for all your short- and long-term financial goals, from paying off debt to buying a home to taking a long vacation from work and more.

Or maybe there are many goals, but you don’t have an exact timeline for any of them yet — you just know that when your company goes public, you’ll be overexposed and want to diversify your financial portfolio.

Part of your company’s exit strategy may be to sell a portion during each future open trading window, but you can also set up a Rule 10b5-1 plan, which allows company individuals to pre-schedule stock options, even during periods of inactivity.

“Managing that concentrated stock position year after year in a strategic and systematic way is extremely important,” says Moore. “A 10b5-1 plan is basically a game plan. It’s a document that says, ‘I want to sell this number of shares if it hits this price.’ You set the parameters.”

The company that manages your company’s stock awards, such as Morgan Stanley, Merrill Lynch, or Charles Schwab, usually has equity experts you can rely on for free to learn more about your stock options.

Moore, who previously worked in the corporate and institutional services team at Merrill Lynch, says these experts can conduct a detailed analysis of your holdings, including a Black-Scholes valuation, to pinpoint which lots carry the most risk and which options to pursue first. “It’s very technical and created by experts so, in my opinion, it’s much better than trying to execute stocks yourself during an open trading window,” she says.

As you plan for your employee equity, taxes are an unavoidable topic. A liquidity event such as an IPO is likely to trigger a multitude of taxes, depending on the type of capital i when you exercisevest or sell.

For Moore, this is why he stresses the importance of getting a CPA involved. A CPA can evaluate the account before you sell and let you know how much to set aside.

“A simple conversation with a CPA could save you thousands, tens of thousands of dollars,” says Moore. He recalls a case where a simple conversation saved a client $30,000.

Timing is also important. “The best time to meet with a CPA is not during tax season. It’s now, during the summer,” she says. “What you don’t want to do is have this big taxable event and then go to your CPA in the middle of tax season, when they’re … exhausted.”

“An IPO can mean amazing things, but it can also mean significant downside risk,” says Moore, noting the many factors that can affect a company’s valuation, such as CEO behavior and company scandals, including the BP oil spill and Enron’s accounting scandal.

Although these incidents can be extreme, a stakeholder does not need a crisis to lose value. Disappointing earnings reports, a change in sentiment (toward the company or its sector), or a wave of stocks entering the market after a lock-up period can push the stock price down.