Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Negotiate IPO Lockup Agreements to Manage Post-IPO Price Risk
Transcript
- Lucas: So Tesla is down about 18 percent over the past five trading days. That’s not just a rough week — that’s a reminder that public markets can punish stocks brutally, and for founders who just took their company public, the timing of when they can sell their shares is everything. Luna: You’re talking about the lockup period — the window when insiders are contractually barred from selling after an IPO. And we’ve been seeing some pretty creative negotiations around that lately. Lucas: Exactly. The standard lockup is 180 days, set by underwriters to prevent a flood of shares from hitting the market right after the debut. But the one-size-fits-all approach is crumbling. Founders are pushing for flexibility — and they’re getting it. Luna: What does flexible look like in practice? Is it just a shorter lockup, or something more nuanced? Lucas: It’s more nuanced. I’ve seen three main structures emerge. First, a tiered release — say, 25 percent of shares become eligible to sell after 90 days, another 25 after 120, and the rest at 180. That way, the founder isn’t forced to dump everything at once if the stock is down. Luna: Right, it’s like a vesting schedule for liquidity. And founders with strong leverage — like a hot sector or high pre ipo demand — can push for even shorter windows. Lucas: Second is a performance-based early release. The lockup automatically expires early if the stock trades above a certain price for, say, 20 consecutive days. That aligns founder selling with strong market sentiment instead of a rigid calendar date. Luna: That’s clever. If the market is telling you it’s a good time to sell, why wait? But what about the third structure? Lucas: The third is a so-called ‘lockup waiver’ clause, where the underwriter agrees to let a founder sell a limited number of shares — usually through a secondary offering — before the lockup ends, as long as it’s structured and doesn’t tank the stock. We saw that with Airbnb in 2020. Luna: Airbnb famously gave early employees and hosts a chance to sell in a secondary offering at the IPO price, but the founders held tight. That was a waiver scenario, right? Lucas: Exactly. Airbnb’s lockup was originally set at 180 days, but they carved out a specific secondary sale window ahead of the expiration. It gave employees liquidity while keeping the founders’ stakes intact as a signal to the market. Luna: And that’s the balancing act — founders need to signal confidence, but they also have personal financial planning. No one wants to be the founder who sells right before a crash, or who can’t sell when the stock is high. Lucas: Right. And with the market we’re in — look at the NASDAQ trading down, Tesla off 18 percent in a week, even Apple’s up only 4 percent after five days — it’s volatile. A founder who IPO’d six months ago might be staring at a lockup expiration in a completely different macro environment. Luna: So what’s the best practice for a founder who’s about to file their S-1? How do they actually negotiate this with underwriters? Lucas: First, you need data. You have to show the underwriters that a flexible lockup won’t destabilize the stock. That means modeling your insider selling alongside expected institutional demand. If you’re a high-growth company with strong investor appetite, you have leverage. Luna: And you need a trusted banking partner. Some banks are more open to these structures — I’ve heard Goldman Sachs and Morgan Stanley are increasingly flexible, while smaller boutiques stick to the script. Lucas: That’s true. And the conversation has to happen early — ideally during the bake-off when you’re selecting underwriters, not after the filing. If you wait until the quiet period, you’ve already lost leverage. Luna: Before we go deeper, I want to touch on something. Lucas, you and I have been doing this show for a while now, and one thing that sets it apart is that there are no ads. No sponsor breaks interrupting the flow. We’ve deliberately kept it that way because we think this kind of nuts‑and‑bolts conversation is more valuable without commercial interruptions. Lucas: Absolutely. If you’ve found the episodes useful for what you’re building or running — and if you want to help keep it ad‑free — there’s a simple way to support us. It’s at buy me a coffee dot com slash fexingo. No pressure, just a gesture that helps us keep the show independent. Luna: Yeah, exactly. And back to lockups — the other thing founders should think about is the secondary market. Even before the lockup expires, there are mechanisms to hedge or get liquidity. Lucas: Right, you can use a pre-paid variable forward contract or a collar strategy to monetize your shares without selling them outright. That’s advanced, but some founders work with private banks to lock in gains while deferring the sale until after the lockup. Luna: But those come with margin call risks. If the stock drops sharply — like Tesla just did — the bank can demand more collateral. So it’s not risk-free. Lucas: No, it isn’t. In fact, the Tesla drop is a perfect cautionary tale. If you’re a founder who used a margin loan against your stock in the high $300s, and now you’re at $306, you could be facing a margin call. That’s why many advisors recommend keeping a cash cushion. Luna: So the bottom line: lockup agreements are becoming a custom negotiation. Founders who treat them as boilerplate are leaving money on the table — and exposing themselves to huge risk if the market turns. Lucas: Exactly. The IPO isn’t the finish line; it’s the starting gun. And how you manage your liquidity in those first six months can determine whether you walk away rich or watch your paper wealth evaporate. Luna: On that note, let’s look ahead. With the Fed still tightening and GDP growth slowing, we might see more founders push for even shorter lockups. Thirty years ago, 180 days was standard. Could 90 days become the norm? Lucas: I think we’re heading that way. The market is demanding faster liquidity for company insiders, and underwriters are realizing that a rigid lockup actually increases volatility when it expires. A staggered release is better for everyone. Luna: Great conversation. Thanks, Lucas. Lucas: Thanks, Luna. And to our listeners — go take a look at your own cap table and start that lockup conversation early. It pays off.