A Different Kind of Lock Up Period
It is very common when a company is having an initial public offering to restrict their employees and insiders from selling their company shares for a period of time. The length of time is established by the company and the lockup can be very short or can span years. The most common restriction is 180 days or 6 months. There are multiple reasons why companies place these limitations but the most common one cited is that the company does not want to depress the company stock price by allowing a much larger pool of insiders to sell their shares on the date of public offering. There is also fear that there could be larger employee turnover because employees with access to their options may opt to sell their shares and leave the company or stop working altogether. Despite the common practice of a 180-day lockup, these restricted periods are not governed by the SEC or other governmental agencies and are at the discretion of the board of directors and management of the company.
Snowflake led the charge of creative lookup periods when it had its Initial Public Offering (“IPO”) in September 2020. The company allowed their employees to sell a portion of their shares within the first 90 days as opposed to waiting the full 180 days. Airbnb made waves at the end of 2020 when it offered its employees a special 7-day trading window to sell their vested options. Employees were permitted to sell up to 15% of their shares during this special period. In the last month, Robinhood took a different approach to the lockup period by allowing their employees to sell 15% of their options at the IPO and an additional 15% at the 90-day mark.
This different type of lockup period raises a lot of questions such as how much should you withhold at vesting and sale, should you try to go for the IPO “pop”, and should you be selling to cover in order to pay for your initial sales or looking for funding elsewhere? Will these “creative” lockup periods alter the long term sell strategies of holders of double trigger Restricted Stock Units(“RSUs”)? As an example, imagine your company experiences an IPO and all of your RSUs vest. You are able to sell 15% at the IPO and an additional amount at the 90-day mark. You have all the liquidity you need, hopefully enough to cover your taxes, and some extra income to buy some “splurge” items. Your company has a big run up in the company stock by the time you hit the 180-day mark and you are out of the lockup: Do more shareholders wait out the next six months to receive long term capital gains because they were able to meet a lot of their needs with the initial sales? A lot of people fear the “lockup dip” which is the belief that the company stock value will decrease when the employees and insiders are all able to sell their shares at once.
There seems to be a new trend where companies are not just sticking with the standard 180-day lockup. There could be a benefit to both the company and the option holder by creating more original designs but new questions will continue to arise as different equity structures are rolled out. As this landscape continues to change, we will look to address these questions in upcoming articles.
Chris Wall is a Certified Public Accountant and Certified Financial Planner. He best serves those with complex stock compensation needs, including Incentive Stock Options(ISO), Nonqualified Stock Options(NSO), Restricted Stock(RSU/RSA), and Employee Stock Purchase Plans(ESPP). His specialties include tax planning, cash flow analysis, distribution modeling, retirement planning, and withdrawal strategies.
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