Lockup agreements are critical tools during initial public offerings (IPOs) designed to stabilize stock prices and control the supply of shares entering the market. These agreements prevent company insiders, such as founders and venture capital investors, from selling their shares for a set period, typically 90 to 180 days post-IPO.

Stabilizing Share Supply

Lockup agreements help avoid a sudden influx of shares immediately after an IPO, which could cause an oversupply and a rapid decline in stock prices. By restricting insider sales, these agreements allow for a gradual release of shares into the market, ensuring price stability and protecting the company’s valuation.

Building Investor Confidence

When insiders commit to holding their shares, it signals confidence in the company’s future performance. This reassures public investors, encouraging participation during the IPO and stabilizing stock performance in its initial trading phase.

Supporting Long-Term Goals

A stable stock price benefits both the company and its shareholders. It enhances market reputation, making future fundraising efforts, such as secondary offerings, more feasible. By minimizing early volatility, lockup agreements align insider behavior with the company’s broader capital-raising objectives.

Through these mechanisms, lockup agreements promote market stability and play a vital role in an IPO's success.