Lock-up Period

A lock-up period is a certain time period in which you are not permitted to sell or redeem your shares. For a lock-up period, the two main uses are for startups/IPOs and hedge funds. For hedge funds, this time period is given so that the investor can exit from illiquid or unbalanced investments in their portfolio. The lock-up period for hedge funds is generally 30-90 days, which provides the investor time to exit from the investment without having a significant impact on their portfolio due to price changes.

In the case of an IPO, the lock-up period helps keep the issuer’s business model intact, allowing them to continue growing by retaining more cash. A lockup period typically applies to insiders like managers, employees, owners, founders, etc. The purpose of the lock-up period is to prevent the stock price from falling due to a high supply and helps the company maintain the share price.

When this time period ends, the holder of the securities will be permitted to redeem them on a set schedule. Usually, there is a notice given 30-90 days prior so the fund manager can liquidate them, allowing the payment to investors. When there is no lock-up period or a redemption schedule, the manager of the fund will need a lot of cash available. This will result in lower investments and even lower returns. Additionally, the lock-up period is different for each investment, reducing the chances of an extensive liquidation at one time.