IPO Lockup Expiration: A Plan for Your Shares Before Day 181

Your company went public, your equity has a real price, and for a few months you can’t sell any of it. That waiting period is the lockup. When it ends, you’ll face some of the biggest financial decisions of your career in a short window, often while everyone around you is making the same ones.

The best time to plan is before the lockup ends. Here’s what to know.

What an IPO lockup is

A lockup is an agreement between the company, its underwriters and its shareholders not to sell shares for a set period after the IPO. It’s usually 180 days. Some lockups release shares in stages, or end early if the stock trades above a certain price or after an earnings report. Your company’s IPO prospectus spells out the terms.

When the lockup ends, a large number of shares can become sellable on the same day. Stock prices sometimes fall around lockup expiration as that supply hits the market, though it varies a lot from company to company.

Lockup expiration isn’t a free-for-all

Even after the lockup, employees are still covered by the company’s insider trading policy:

• Trading windows. Most companies only let employees trade during open windows, usually starting a day or two after earnings and closing a few weeks before the quarter ends. If the lockup ends during a blackout, you may wait longer.
• Pre-clearance. Executives and some employees need approval before each trade.
• Rule 10b5-1 plans. A 10b5-1 plan sets up future sales on a schedule, so they can happen even during blackouts. New plans have a cooling-off period before the first sale: generally 30 days for most employees, and 90 to 120 days for directors and officers. Many companies let you set one up before the lockup ends so sales can start soon after. Check with your company’s legal team.

How your equity is taxed around an IPO

RSUs

Many private companies grant “double-trigger” RSUs, which vest only after you’ve met the time-based schedule and a liquidity event like an IPO happens. When the IPO happens, years of RSUs can vest at once, and their full value is ordinary income that year.

Companies usually withhold federal tax at 22% (37% on supplemental wages over $1 million in a year), often by holding back shares. For many people, that’s well short of the real tax. Expect a large balance due unless you plan for it.

ISOs

If you exercised ISOs before the IPO and hold the shares 2 years from grant and 1 year from exercise, the whole gain is a long-term capital gain. Selling sooner is a disqualifying disposition, and the spread at exercise becomes ordinary income. If you paid AMT when you exercised, a sale can help you recover it through the minimum tax credit.

NSOs

Exercising NSOs creates ordinary income on the spread, with payroll taxes and withholding. Gains after exercise are capital gains, long-term if held more than a year.

Build the plan before the lockup ends

1. Know what you own

List every grant: type, number of shares, cost basis, acquisition date and which holding periods you’ve met. Your equity portal and past tax returns have most of this.

2. Run a tax projection for the IPO year

Add up RSU income, any option exercises and planned sales. Compare it to what’s been withheld. Most people with a big IPO year should make estimated payments or raise withholding to stay inside the safe harbor rules.

3. Set a target for company stock

Decide how much of your net worth you want in company stock a year from now, and three years from now. Many people aim to get well below half of their net worth over time. That target drives how much you sell, not the stock price on any given day.

4. Decide what to sell first

Start with the shares that cost the least in tax to sell, often RSU shares that vested at or above today’s price, or shares already held more than a year. Hold back shares that are close to a better tax treatment, like ISOs a few months from a qualifying disposition, if the wait fits your risk tolerance.

5. Set aside the tax money

Move cash for taxes into a separate account or Treasury bills as soon as you sell. It’s easy to spend or reinvest money that’s already owed to the IRS.

6. Decide what the money is for

Paying off a mortgage, funding a few years of living expenses, giving to charity or simply building a diversified portfolio are all reasonable. Deciding in advance makes the sell decision easier. Our work-optional calculator can show how a liquidity event changes your timeline.

Common questions about IPO lockups

How long is a typical IPO lockup?

Usually 180 days after the IPO, though some companies use shorter periods, staged releases or early-release triggers. Check your company’s prospectus.

Does the stock always drop when the lockup expires?

No. Prices sometimes dip around lockup expiration as more shares become available, but it depends on the company, how the stock has done since the IPO and how many shares unlock.

Can I sell the day the lockup ends?

Only if your company’s trading window is open and you’re not otherwise restricted. A 10b5-1 plan set up in advance can make selling on schedule easier.

Should I sell all my shares when the lockup ends?

There’s no single answer. It depends on how much of your net worth is in the stock, your tax picture and what you need the money for. Many people sell a meaningful portion right away and the rest on a schedule.

Get help before the window opens

An IPO can change your financial life in a few months. A plan made before the lockup ends is far easier to follow than one made while the stock is moving.

Related reading:

• Why Holding Vested RSUs Might Be Riskier Than You Think
• How to Exercise ISOs Without Triggering AMT
• Understanding the Wash-Sale Rule and Equity Compensation

Disclaimer: This content is for informational purposes only and is not tax, legal or investment advice. Your company’s lockup agreement and insider trading policy govern when you can sell. Memento Financial Planning is a Registered Investment Adviser in the Commonwealth of Massachusetts.