Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / Why Lockup Expirations Are the Real IPO Clock
Transcript
- Lucas: Rivian, ticker R-I-V-N, is down over seventeen percent in the last five days. That is not a normal wobble. That is the market recalibrating around a lockup expiration that hit last week. Luna: Seventeen percent in five days. And Rivian is not a small cap — it is still a multibillion-dollar company. What happened exactly? Lucas: Right. So the lockup on a big tranche of insider shares expired on June third. That means employees, early investors, and venture backers who had been sitting on paper wealth for years were suddenly free to sell. And a lot of them did. Luna: And the market knew it was coming. It is not a surprise. But the selling still crushed the stock. Lucas: Exactly. And that is the paradox of the lockup expiration. It is the most predictable catalyst in the IPO lifecycle. Every single investor knows the date. But the volume of shares that hits the market is often so large that the stock just cannot absorb it without a gap down. Luna: So for listeners who have not been through an IPO — what exactly is a lockup? Walk us through the basics. Lucas: Sure. When a company goes public, the underwriting banks — Goldman Sachs, Morgan Stanley, whoever is leading the deal — require insiders to sign a lockup agreement. Typically ninety to a hundred and eighty days. The idea is that you do not want the founders and early backers dumping their shares on day one. It would crater the offering and hurt the institutional investors who bought into the IPO. Luna: So the lockup is a gate. It keeps the supply of shares artificially tight for the first few months. Lucas: Right. But the day that gate opens, the entire overhang of insider shares becomes available. And the math gets ugly fast. If the insider pool holds, say, forty percent of the company — which is common for a venture-backed IPO — and only ten percent of the company was sold in the offering, you are suddenly adding four times the float into the market. Luna: And that is what hit Rivian. But Rivian is not unique. We saw similar moves on companies like Coinbase and Robinhood when their lockups expired. Lucas: Coinbase was particularly instructive. When its lockup expired in October 2021, insiders sold over five billion dollars worth of shares in the first few days. The stock lost about thirty percent of its value in that window. And the selling continued for weeks. Luna: So if you are a founder or an early employee sitting on a huge position, you are facing a prisoner's dilemma. You want to sell before everyone else sells, but if you all sell at once, you destroy the price. Lucas: That is exactly the dynamic. And it gets worse because the underwriters often let certain insiders sell earlier through something called a lockup waiver. So the founders might have negotiated a staggered release — say, twenty percent of their shares can trade after sixty days, another thirty after ninety, and the rest at standard lockup expiration. Luna: Staggered lockups are becoming more common. I have seen them in recent tech IPOs like Arm and Instacart. They give the market a slower drip instead of a firehose. Lucas: And that is smarter because it signals to the market that insiders are not just sprinting for the exit. It also allows the company to announce a secondary offering — where they sell shares on behalf of insiders in a controlled, underwritten block trade — rather than letting individuals sell into the open market at unpredictable times. Luna: Secondary offerings are often announced right at lockup expiration. The company hires a bank to sell a big block of shares overnight, usually at a small discount to the market price. And the stock takes a hit, but it is a one-time hit, not a slow bleed. Lucas: Right. And that is actually the cleaner way to do it. The problem with the free-for-all is that you have no coordination. You get the kind of seventeen percent drop we have seen on Rivian. If the company had done a pre-arranged secondary, maybe the drop would have been five or six percent, and the stock would have stabilised much faster. Luna: But not every company can do that. Some lockup agreements explicitly prohibit secondary offerings during the lockup period. And some founders do not want to give the banks another fee. Lucas: That is true. And there is another path: the direct listing. Palantir went public via a direct listing in 2020, and it did not have a lockup at all. Insiders could sell from day one. But Palantir's shares had traded on the private market for years, so there was a price discovery mechanism already in place. It worked for them, but it is not a one-size-fits-all solution. Luna: Honestly, if today was worth a coffee to you, that is the link — buy me a coffee dot com slash fexingo. Keeps the show independent and ad-free. Lucas: And if these conversations are useful for what you are building or running, that link is there. No pressure, but it helps us keep digging into mechanics like these. Luna: Yeah, absolutely. So back to lockups — one thing I find fascinating is how the lockup expiration itself can be a trading opportunity. Some hedge funds specifically short stocks going into lockup expiration, expecting the drop. Lucas: And they are often right. There is a whole subset of event-driven funds that model the exact amount of insider selling pressure and take positions accordingly. They will look at the insider ownership percentage, the lockup expiration date, and the recent trading volume, and they will estimate how many days it will take for the market to absorb the selling. Luna: So they are basically betting that the stock will decline by a certain amount over a certain window. And if they are right, they make money. If they are wrong — say the company announces a big buyback to offset the selling — they can get squeezed. Lucas: Exactly. And that is the other side of the coin. Some companies proactively announce a share repurchase program right before the lockup expires to absorb some of the selling pressure. It sends a signal that the company believes in its own stock and it provides a bid in the market. Luna: Do you have a recent example of that working well? Lucas: Airbnb, ticker a b n b, did something similar when its lockup expired in late 2021. They announced a two-billion-dollar buyback a few weeks before the lockup lifted. The stock still dropped on the expiration day, but it recovered much faster than comparable companies that did not have a buyback in place. Luna: So the buyback acts as a shock absorber. It gives sellers a counterparty without forcing the stock to fall as much. Lucas: Right. And it also signals to the market that the company is not worried about the insider selling. It says, 'We think the stock is cheap enough to buy back.' That confidence can actually reduce the amount of selling because some insiders decide to hold rather than sell into a buyback. Luna: Interesting. So for founders who are listening and thinking about their own exit timelines — what is the one thing you would tell them about lockup expirations? Lucas: Plan for it. Do not treat the lockup expiration as a distant event that will take care of itself. Start talking to your bankers at least six months before the lockup expires. Discuss whether a secondary offering, a staggered lockup, or a buyback makes sense for your situation. Luna: And if you are an early employee holding options or restricted stock units, the same advice applies. You need to know when your shares become tradable and you need a plan for how much to sell and when. Lucas: Because the worst thing you can do is wake up on lockup expiration day and panic-sell along with everyone else. That is how you get the worst price. If you can sell a portion into a secondary offering or a buyback, you are likely to get a much better outcome. Luna: And for investors listening — the lockup expiration is one of the most predictable events in the calendar. If you can model the selling pressure, you can either avoid the stock or even profit from it. But you have to be careful because the market often prices in the expiration weeks in advance. Lucas: That is a key point. The lockup expiration is not a secret. By the time the date arrives, the stock may have already declined in anticipation. So the actual expiration day can sometimes be a non-event — or even a relief rally if the selling is less than feared. Luna: So the efficient market hypothesis works both ways. If everyone expects a seventeen percent drop, the stock might fall twelve percent before the expiration and only another five on the day. Lucas: Exactly. And that is why you have to look at the specific company. Rivian's lockup was especially large because the company had raised so much venture capital before going public. It had a very high insider ownership relative to the public float. That is why the drop was so severe. Luna: So the lesson is: the lockup expiration is not just a technical detail. It is a fundamental part of the IPO process that can shape the stock's performance for months. And founders who ignore it do so at their own risk. Lucas: I think the next wave of innovation in IPO structuring will be about managing this lockup overhang more intelligently. We are already seeing more companies use direct listings and SPAC mergers that have different lockup structures. And some companies are even using derivative strategies — like put options or collar transactions — to hedge the insider selling exposure. Luna: That is fascinating. Can you give an example of a collar transaction in this context? Lucas: Sure. A founder who owns a large block of stock can buy a put option to protect against a decline while selling a call option to generate income. That effectively locks in a price range. If the stock falls, the put pays off. If the stock rises, the call limits upside. It is a way to monetise the position without actually selling the stock. Luna: And that avoids triggering the lockup because you are not selling shares. You are just buying options. Lucas: Right. And it also avoids the market impact of a large sale. But it is complex and expensive, and not all founders want to deal with it. Still, as the IPO market matures, I expect we will see more of these structured solutions. Luna: So to sum up: lockup expirations are a critical but often overlooked part of the IPO process. Founders need to plan for them, investors need to watch for them, and the market is getting better at managing them. Lucas: And if you are sitting on a big insider position, the worst move is to do nothing. Talk to your advisors, look at the calendar, and have a strategy. Because when that lockup expires, the clock is ticking.