Even if there is a blocking agreement, investors who are not insiders of the company may be affected as soon as this blocking agreement exceeds the expiry date. When the blockages expire, the company`s insiders will be able to sell their shares. If many insiders and venture capitalists are looking for an exit, this can lead to a dramatic fall in the price due to the huge offer of shares. The lock-in agreements are designed to protect investors. The lockout agreement aims to avoid a scenario in which a group of insiders makes a company public overvalued and rejects it on investors and runs away with profits. Those considering investing in the business should determine the length of the prohibition period. This is because insiders who sell part of their shares can put downward pressure on the company`s stock. Similarly, business leaders and some employees may have benefited from stock options as part of their employment contracts. As with VCs, these employees may be tempted to exercise their options and sell their shares, as the company`s IPO price would almost certainly be well above the exercise price of their options. It is interesting to note that some of these studies have found that staggered locking agreements may actually have more negative effects on an action than those with a single expiration date. This is surprising, as staggered locking chords are often seen as a solution for post-lock-up dip. The goal of a lockout agreement is to prevent corporate insiders from throwing their shares at new investors in the weeks and months following the IPO.
Some of these insiders could be early investors, such as venture capital firms, who made their purchases in the company when it was worth significantly less than its IPO value. They may therefore have a strong incentive to sell their shares and make a profit from their initial investment. A blocking agreement is a contractual clause that prevents a company`s insiders from selling their shares for a specified period of time. They are often used in the IPO.