That startup founders are in the driver’s seat has been evident for a while now. Consider how much funding has skyrocketed as investors seemingly hit a record high $93 billion in early-stage US startups last year – triple what they raised five years earlier. Consider that the median valuation of start-up and early-stage startups doubled over the same period.
Also consider the continuous rise dual-class shares that give founders outsized voting power. Almost 30% of IPOs between 2017 and 2019 had dual-class structures, and that number likely increased between 2019 and the end of last year.
A less-discussed point of evidence that highlights how far founders can currently push their investors — and possibly bankers — centers around lock-in periods. Typically a 90-180 day window after a company begins listing on the stock exchange – a period during which founders, investors and employees agree not to sell their shares to show confidence in the company and inspire confidence in new shareholders – blockages begin to disappear, and quite quickly. According to new research of Renaissance Capital, which manages exchange-traded funds focused on IPOs, early blocking provisions “blew up” last year.
According to the figures, a quarter of the year’s IPOs (or 91 offerings) had provisions for early releases. That’s more than five times the number in 2020. Not surprisingly, tech IPOs accounted for 60 of new issuers with early blocking provisions, or 66% of the group.
You may recall reading about some of these offerings back then, including one from Coupang and Robinhood. In the case of Coupang, South Korea’s largest e-commerce retailer, it announced the early publication of a share blocking agreement for about 34 million shares just a week after its March debut on the NYSE. based on a specific condition – that his stock was to close at or above its $35 IPO price – which was quickly met. (The shares are trading today at around $26 each.)
When Robinhood began trading in late July, employees were allowed to sell 15% of their holdings immediately and another 15% three months later.
Snowflake, the data warehousing company that went public in the fall of 2020 and allowed employees to sell up to 25% of their acquired shares three months later, was one of the other companies to ease restrictions. blockages; Airbnb, which went public in December 2020 and allowed employees to sell up to 15% of their shares in its first seven trading days; and DoorDash, whose underwriters have also agreed to cut in two the company’s 180-day lock-up agreement for certain shares after its IPO in December 2020.
Dutch Bros., Allbirds, The Honest Company, TuSimple and Affirm also introduced early lockdown provisions, Renaissance’s report notes.
Lock-up periods were never required by the Securities and Exchange Commission, but have long been seen as a sign of good faith for outsiders — and have even helped some public market shareholders plan their stock purchases. (Often, a company’s stock price will fall following a traditional lock-up, as early investors unload their shares en masse, increasing the supply of available shares. When the lock-up period Uber ended in 2019, for example, its shares fell 43% below their IPO price as newly sold shares flooded the market.)
So what exactly is going on? A number of trends have since conspired to reduce these metrics, from the longer period of many companies now operating as private companies (creating greater insider demand for cash) to the advent of direct listings. Only one of the 12 direct registrations to date has presented a blockage, that of Palantize.
Another factor is the rise last year of special purpose acquisition companies, or SPACs. Like the New York Times reported last spring, many related transactions contain language that prevents sponsors from selling shares for one year from the day the transaction closes, but there are much faster solutions. According to a popular provision, if the shares of a SPAC trade slightly above their original price for more than 20 days in a 30-day period, the lock-up provision disappears. Sometimes the terms are even more porous. Indeed, when ride-sharing giant Grab began trading publicly last month following a combination with a blank check company, more than 20% of the shares held by the company’s shareholders were immediately tradable after the merger.
The common thread here is that all involve founding teams who have demanded and obtained more flexible lock-in terms from their investors, who are also largely benefiting from the trend. (Which VC would rather have their hands tied for three to six months after a public offering?)
In the meantime, while Renaissance note in its new report, blockages are not only less numerous, but they are becoming more and more difficult to follow. As the report observes: “Instead of a simple reduction in lockout days, early releases are now routinely based on results dates or blackout periods that are indefinite at the time of the IPO. The exit date can also be a moving target, depending on the stock price hitting a certain threshold (e.g. once the stock is 33% above the IPO for 10 of the 15 trading days). consecutive scholarship).
Additionally, he adds, “Early releases are often buried in complex legalese and can be vague as to the actual number of actions published. . .”
The big question is whether public market shareholders care about the increasing disappearance of lock-up periods, and at present there is no strong case for them to do so. While SPACs have significantly underperformed typical IPOs, direct listings – perhaps because there are far fewer of them – have performed better.
As for the broader market, US equities had a banner year in 2021, so investors are unlikely to back down much until that changes. After that, all bets are off.
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