Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Lockup Agreements to Time Their IPO Exit
Transcript
- Lucas: Lovable reportedly in talks to double its valuation to 13.2 billion dollars. That headline from this week got me thinking about something founders don't talk about enough in the run-up to an IPO: lockup agreements. Luna: The period after you go public where you can't sell your shares. It's like being handed the keys to a car but told you have to wait six months before you can drive it. Lucas: Exactly. And the conventional wisdom is that lockups protect the stock from a flood of insider selling. But for founders, it's a liquidity trap. You've just created billions in paper wealth, but you can't touch it. And if your lockup expires at a bad time, you might be selling into a falling market. Luna: So how do founders plan around that? Especially when the lockup period is typically 180 days, but sometimes shorter or longer depending on the underwriter. Lucas: Right. The standard lockup is 180 days, set by the underwriters to keep the stock stable during the initial trading months. But founders can negotiate early-release clauses. For example, if the stock trades above a certain price for a set number of days, they can sell a portion early. Or they can structure a pre-arranged trading plan under Rule 10b5-1 to sell gradually. Luna: And let's be real — if you're a founder sitting on a big stake, the last thing you want is to be the reason your own stock craters. But sometimes the market does it for you. Look at Tesla — down over 7 percent in the last five days. If you're a founder whose lockup just expired, you're probably not thrilled. Lucas: That's the balancing act. On one hand, you want liquidity. On the other, you don't want to signal distress. And if you're a major shareholder, any insider sale above a certain threshold has to be filed with the SEC, which the market then interprets. So timing is everything. Luna: If these conversations are useful for what you're building or running, we should mention that listener support is what keeps this show ad-free and independent. If you find value in episodes like this, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: Appreciate that. So back to lockups — there's also the question of employee lockups. Employees often have the same 180-day restriction, but they might not have the same information or ability to plan. Some companies create early liquidity programs where employees can sell a portion of their vested options before the lockup ends. Luna: That's a good point. Because if you're an early employee with options, you're probably more eager to cash out than the founder. But the lockup applies to everyone equally, unless the company carves out exceptions. Lucas: And those exceptions are becoming more common. In recent IPOs, we've seen companies file for 'lockup waivers' that allow certain shareholders to sell earlier. But here's the kicker: if the waiver is too broad, it can spook the market. So underwriters are cautious. Luna: So what's the playbook for a founder today? Let's say you're Lovable's CEO, looking at that 13.2 billion valuation. You're about to file confidentially, you're thinking about your lockup. Lucas: First, you negotiate the lockup period upfront. Standard is 180 days, but some companies get away with 90 or 120 if they have strong investor demand. Second, you build in a market-based release: if the stock trades above your IPO price plus, say, 20 percent for 20 consecutive days, early sales are allowed. Third, you set up a 10b5-1 plan before the lockup expires so you're selling on autopilot, not reacting emotionally. Luna: And that plan has to be set when you're not in possession of material non-public information. So you literally set it months in advance and then let it run. Lucas: Right. And the beauty of a 10b5-1 plan is it removes the stigma of insider selling because it's pre-scheduled. The market knows you're not timing based on inside info. But it also means you can't hit pause if the stock drops, unless you cancel the plan — which itself can be a signal. Luna: So what about the actual expiration day? We've seen stocks drop 5 to 10 percent on lockup expiration if a big insider sell order hits. How do founders avoid that? Lucas: One strategy is to coordinate with other large shareholders. If everyone sells on the same day, it's a bloodbath. So sometimes the underwriter organizes a secondary offering right at expiration, which absorbs the selling pressure in an orderly way. Or the founder agrees to sell through a block trade after hours. Luna: Block trades are interesting — you sell a big chunk to an institutional investor at a discount, but the market only sees it after the fact. That can limit the price impact. Lucas: Exactly. And there's also the option of selling a portion during the IPO itself as part of the secondary offering. But that reduces the amount of primary capital raised, which the company might need for growth. It's a trade-off. Luna: Let's look at a recent example. NVIDIA's up over 3 percent in the last five days. If you're an NVIDIA insider whose lockup expired years ago, you've had plenty of opportunity. But for a newly public company, say one that IPO'd in the last six months, the lockup expiration is a big event. Lucas: And that's where the market's perception of the company matters. If the business is performing well, like NVIDIA, the market can absorb insider selling. But if the stock is already under pressure, like Tesla down 7 percent, lockup expiration could add fuel to the fire. Luna: So founders need to be aware of the broader market environment. If the sector is hot, they might get a better price. If it's cold, they might want to delay or use a structured exit. Lucas: And there's one more tool: the use of prepaid variable forward contracts or equity swaps. These let a founder monetize their stock without technically selling — they get cash now, and the counterparty takes the stock later, after the lockup. But the SEC has been scrutinizing these arrangements more closely. Luna: Because it's essentially a way to get liquidity without filing a sale. The SEC wants to know who's economically exposed. Lucas: Exactly. So the cleanest approach is still the old-fashioned one: negotiate a good lockup, set up a 10b5-1 plan, and coordinate with your underwriter. It's not glamorous, but it avoids nasty surprises. Luna: And for the listeners who are founders thinking about an IPO, what's the one takeaway? Start planning your lockup exit strategy at least a year before you file. Lucas: Absolutely. The lockup isn't a passive restriction — it's a financial instrument you can shape. The founders who treat it as such are the ones who sleep better after the bell rings. Luna: And maybe have a good coffee waiting. Thanks for tuning in.