[psuter]

Very interesting and educational read. Even if you know a little bit about how IPOs work, reading through the complete timeline helps understand the roles and the steps involved.

One question that came after reading:

    The underwriter won’t move forward unless they get a very
    high percentage (99-100%) of employees/shareholders to sign
    a lock-up.

What are the incentives for employees to sign such an agreement? It sounds like the only point in the process where an (organized) group of employees could have some leverage?

[chollida1]

I'll start by saying I'm not surprised employees get the shaft as I've spent countless hours analyzing the IPO process looking for trading advantages and I still don't fully understand it:(

Quite often the choice of a lockup is out of the companies hands, many states require it. The SEC however doesn't require a lock up, they just recommend it.

http://www.sec.gov/answers/lockup.htm

http://www.sec.gov/answers/bluesky.htm

I'm guessing most companies include language about this when you join and get your first option grant. They usually don't go around to each employee and get them to sign something before an IPO as their initial grant language often covers this. if they do please let me know:), Actually I take that back, that would probably be insider knowledge, please don't tell me:)

Rule 7-G http://www.law.cornell.edu/cfr/text/17/230.701 covers this if you feel like reading some really dry material:)

It is possible for the company to file an S-8 registration form to allow some shares to be sold but many companies don't file this form.

Here is a good paper on analyzing the trading of locked up shares.

http://pages.stern.nyu.edu/~eofek/PhD/papers/FH_The_JF.pdf

[melvinmt]

Is it insider knowledge if the company is not public yet?

[wtvanhest]

I have very limited experience with this, but when I signed our corporate formation documents, the lockout was written in the restricted stock agreement.

It is likely agreed on before employees every start their first day of work.

[joshjkim]

Practically, it's really less an incentive than a requirement imposed by the shadow of the future/hypothetical IPO and its future/hypothetical underwriter's strong preference (read: requirement) - even at incorporation when founder's purchase stock (perhaps 10 years before the IPO) they are required to agree to a lock-up for the same reasons as a stockholder who purchases stock one-year before an IPO in a growth-round.

In practice, almost all vc-backed companies with decent attorneys will ALWAYS require a lock-up provision in almost every security issuance documents including: 1. founder stock purchase agreements 2. employee stock option agreements and 3. VC preferred stock purchase agreements.

This shows how much influence the underwriter's ultimately have over the entire IPO process, even 10 years prior and with basically less than 1% chance of actually occurring haha.

The reason for the underwriter's ridiculously strong preference (really requirement) is that if insiders of a company (aka. people who work at the company and therefore (supposedly) have inside knowledge that the market does not have) sell 1% of a company quickly after an IPO, it can introduce a significant amount of volatility to the stock price because the market (almost) always reads an insider's sale of stock as a negative signal - this is why there's always buzz about potential price drops before a lock-up (though at this point it's often priced in well before hand).

[joshjkim]

As a follow-up: here's sample language from a founder stock purchase agreement (from orrick's start-up forms - https://www.orrick.com/Events-and-Publications/Documents/197...), where you can see it literally references IPO, underwriter's, securities laws, etc.

Lock-Up Agreement. If so requested by the Company or the underwriters in connection with the initial public offering of the Company’s securities registered under the Securities Act of 1933, as amended, Purchaser shall not sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company however or whenever acquired (except for those being registered) without the prior written consent of the Company or such underwriters, as the case may be, for 180 days from the effective date of the registration statement, plus such additional period, to the extent required by FINRA rules, up to a maximum of 216 days from the effective date of the registration statement, and Purchaser shall execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of such offering.

[lmm]

The IPO is presumably good for the share price (and indeed the ability to sell the shares at all, even after a 3- or 6-month lockup) - it gives employees with shares the chance to cash out just like any other shareholder. And the importance of your signature on the agreement is directly proportional to how many shares you own.