Lock-up agreement

Agreement between an underwriter and certain stockholders of a company requiring the stockholders to refrain from selling their shares in the public market for a specified lock-up period after a public offering. In the case of a venture capital deal, this prevents the investee company’s executives and the venture capitalist from selling their shares immediately after an IPO. The reasoning behind this restriction is that such a sale would send worrying signals to the market and thus force down the price of shares. Remaining stockholders would then have shares worth far less than their value at IPO.