Loosening IPO Lockups

Six-month lockup periods used to be the strong recommendation from banks that underwrote traditional IPOs; no longer.

Silicon Valley is changing the rules for initial public offerings (IPOs). Duolingo, Robinhood Markets, DoorDash and Airbnb recently went public but didn’t impose the typical six-month lockup on employee stock sales.

Language-learning firm Duolingo decided in July 2020 to let its employees sell 25% of their shares in the first seven days of trading. Online brokerage Robinhood permitted staff to sell 15% of their shares immediately, and another 15% three months later.

Six-month lockup periods used to be the strong recommendation from banks that underwrote traditional IPOs. Goldman Sachs, JPMorgan Chase and Morgan Stanley insisted on limiting the initial amount of shares in the market to sustain the offering price. Having employees refrain from selling shares also signaled commitment by demonstrating that they were devoted to their company.

Nevertheless, a hot IPO market and a friendly jobs market changed this approach. Employees want to cash in some of their shares quickly, but few big investors want additional shares diluting their IPO profits.

On the face of it, flexibility isn’t such a bad idea. Allowing employees to sell shares earlier can increase office morale, while bankers start to see the silver lining. What’s more, staggering the lockup can help avoid a price drop six months later, when lockups typically expire. Uber Technologies, for example, lost $2 billion in market cap within a few hours after its lockups ended in November 2019.

Other companies that have offered shorter lockup periods include data warehousing firm Snowflake, which let employees sell 25% of their stocks three months after its IPO. Even better, vacation rental company Airbnb told its workers they could offer 15% of their shares in the first seven trading days.

Promising startups are no longer obliged to follow the golden rules of yesterday. Foregoing lockups altogether, founders may choose to follow the direct-listing playbook. Asana, Palantir and Slack had no lockups. They registered to go public and permitted investors to sell their stocks immediately. Bankers eager to preserve their piece of the IPO pie need to take note and loosen up.