How to Answer “What is a lock-up period in an IPO, and why does it matter?” in Investment Banking Interviews
In investment banking interview prep, interviewers often ask: “What is a lock-up period in an IPO, and why does it matter?” because it tests whether you can explain a core equity markets concept and connect it to real aftermarket dynamics.
A strong analyst answer defines the lock-up period IPO clearly, identifies who is restricted (insiders and pre-IPO holders), and then explains the practical impact: managing early selling pressure and creating a known catalyst when the restriction expires.
What Interviewers Test: IPO Lock-Up Significance
Interviewers are assessing whether you understand the equity lock-up period as both a deal term and a market-structure tool. You should be able to state who typically signs lock-ups (founders, management, employees, VC/PE funds), what’s restricted (sales and often hedging/derivative monetisation), and that the duration varies by deal.
They’re also probing IPO lock-up significance in the aftermarket: how limiting insider selling can support orderly trading and price discovery right after listing, and how lock-up expiry can change supply/liquidity expectations. Good answers stay probabilistic—expiry can pressure a stock, but outcomes depend on float, volumes, and sentiment.
Finally, it’s a communication test common in investment banking technical questions. The best candidates lead with a one-sentence definition, then deliver a structured “why it matters” for three audiences: the company/underwriters, existing holders, and new investors in equity markets.
Answer Framework: Equity Lock-Up Period (Step-by-Step)
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Step 1: Define the lock-up and name the parties involved
Start with a crisp definition: a lock-up period is a contractual restriction, typically agreed as part of the IPO process, that prevents certain shareholders from selling their shares for a set time after the IPO.
Be specific about who it applies to: founders, management, employees with equity, and pre-IPO investors such as VC/PE funds. This is where many candidates sound vague—don’t.
Add what is restricted: selling into the public market, and in many deals also transactions that effectively monetise the position (for example, certain hedges or derivative structures). Keep it high-level—your goal is to demonstrate understanding lock-up periods, not recite legal language.
If asked about timing, give a range rather than a single number (commonly around 90–180 days, but deal-specific).
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Step 2: Explain the purpose in equity markets (supply control + price discovery)
Then explain why lock-ups exist: they help manage the transition from a private cap table to a public float. Immediately after pricing, the freely tradeable float is often limited; if insiders could sell on day one, you could see a sudden surge in supply that overwhelms demand.
From an equity markets perspective, lock-ups can support more orderly price discovery and reduce the risk of disorderly early trading. Underwriters also like them because they reduce the chance that heavy insider selling undermines confidence right after the debut.
Mention signalling carefully: insiders being locked up may be interpreted as alignment with new shareholders, even though it’s also standard underwriting practice. This ties directly to IPO interview prep because it shows you can connect incentives to market outcomes without making absolute claims.
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Step 3: Describe expiry as a known catalyst and the investor lens
Next, cover the most “tradable” angle: lock-up expiry. When the lock-up ends, a larger number of shares become eligible for sale, increasing potential float.
Why it matters: it can create volatility or downward pressure if (a) the unlocked shares are large relative to the existing float, (b) average daily volume is low, or (c) insiders are motivated to sell (liquidity needs, portfolio rebalancing, fund life-cycle). This is the heart of lock-up period implications for investors.
Stay balanced: expiry does not guarantee selling, and markets often partially price the event in advance. The impact depends on supply versus liquidity, the company’s fundamentals, and broader sentiment.
If you want to sound like an analyst, frame it as “eligibility to sell” rather than “they will sell”.
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Step 4: Add practical deal nuance (exceptions, releases, and how bankers talk about it)
Round out the answer with a few practical points bankers care about. Lock-ups are set out in lock-up agreements tied to the underwriting process, and exceptions can exist—such as underwriter-approved releases, limited transfers to affiliates, or certain non-discretionary transfers.
It’s also useful to note that lock-ups can shape how investors think about the true free float in the early weeks, and how that interacts with aftermarket trading and liquidity. In some situations, the market will focus on the “unlock size” (shares coming eligible) versus current float rather than headline shares outstanding.
Bring it back to the interview question: why lock-up periods matter in IPOs is ultimately about managing supply and confidence immediately post-listing, and about a predictable future supply event at expiry that investors monitor closely.
Lock-Up Period IPO: Model Answer for Analysts
A lock-up period in an IPO is a contractual restriction—typically agreed between insiders/early shareholders and the underwriters—that prevents those holders from selling their shares for a set period after the company lists.
It matters because right after an IPO the free float is usually limited, and allowing founders, employees, or VC/PE holders to sell immediately could flood the market with supply, disrupt price discovery, and send a negative signal. The lock-up helps support a more orderly aftermarket by reducing near-term selling pressure and, at least optically, aligns insiders with new investors.
The second reason it matters is the lock-up expiry. When restrictions lift, a meaningful number of shares may become eligible for sale, which investors treat as a known catalyst. If the unlock is large relative to the existing float and average daily volume, you can see higher volatility or downward pressure—especially if sentiment is weak or insiders clearly want liquidity. But expiry doesn’t automatically mean selling; the market impact depends on fundamentals, the size of the unlock versus liquidity, and holders’ intentions.
So for a lock-up period IPO, I’d summarise it as a tool to manage early supply and confidence after listing, with an important calendar event at expiry that can affect liquidity and pricing.
- Lead with a definition that stands alone; then add “why it matters” (stability/signalling, then expiry catalyst).
- Name the stakeholder groups (insiders/early investors, underwriters, new investors) to avoid a generic answer.
- Use conditional language around price impact: “can” and “depends on” rather than “will drop”.
- If pushed, quantify the intuition: unlock size vs float and average daily volume are the key lenses.
Common Pitfalls in Investment Banking Technical Questions
- Giving only a definition and not addressing aftermarket impact (supply, liquidity, signalling, and expiry as a catalyst).
- Stating that lock-up expiry always causes a sell-off; the effect depends on unlock size, liquidity, fundamentals, and sentiment.
- Not specifying who is locked up (founders/management/employees/VC/PE), which makes the explanation sound memorised.
- Ignoring that some lock-ups restrict hedging or other monetisation transactions, not just outright share sales.
- Mixing up lock-ups with other IPO tools (like the greenshoe/overallotment) without clearly distinguishing their purpose.
- Over-legalising the answer instead of keeping it equity-markets focused and interview-friendly.
Follow-Ups for IPO Interview Prep (Lock-Ups)
How long is a lock-up period typically, and who decides it?
Commonly around 90–180 days, set through lock-up/underwriting agreements negotiated among the company, key holders, and the underwriters.
Why might a stock not fall when the lock-up expires?
If the unlock is small versus liquidity, fundamentals and sentiment are strong, or insiders don’t sell materially, the market can absorb the additional eligible supply.
How do investors gauge the risk around lock-up expiry?
They compare shares unlocking to current float and average daily volume, assess insider ownership and likely selling pressure, and watch for other catalysts that affect demand.
Can insiders ever sell during the lock-up?
Sometimes, but typically only via explicit exceptions or an underwriter-approved release; many agreements also prohibit hedges that effectively monetise the shares early.
How is a lock-up different from the greenshoe (overallotment option)?
A lock-up restricts existing holders from selling; the greenshoe gives underwriters flexibility to sell/buy additional shares to manage allocations and stabilisation.
Practice Drills for Understanding Lock-Up Periods
- Practise a 60-second structure: definition → purpose (supply/price discovery + signalling) → expiry as a known catalyst.
- Rehearse one investor-focused line: “It increases potential float at expiry; impact depends on unlock size versus ADV and sentiment.”
- Drill two follow-ups aloud (typical length, why expiry may not move the stock) so you can handle common investment banking technical questions calmly.
- Use AceTheRound to run timed reps and get feedback on whether your answer stays conditional and market-based rather than absolute.
- Record yourself once: aim to remove filler and keep the first two sentences “snippet-ready” for interview delivery.
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