An IPO Unlock is a date that marks the end of the “lockup period,” usually 90 or 180 days after the IPO, where major shareholders and insiders of a recently IPO’d company are finally allowed to sell their shares on the open market after previously being “locked out”. The exact stipulations of these restrictions are outlined in the S-1 for the IPO with updates to the S-1 (S-1As) outlining any changes. 

Prior to this “unlock date” the recently listed shares have begun trading on the open market but those founders, employees, and early investors (often VCs) have been kept out of the market to avoid creating overwhelming selling pressure that could harm investors who’ve just been convinced by the sponsoring investment bank to participate in the IPO placement.

It’s important to remember that each IPO is different, with different corporate fundamentals, ownership bases, and market environments. All of these factors need to be considered when assessing if/how to play an IPO Unlock. 

We can’t look at every type of IPO here, so for our sake we’ll focus on the hypothetical example of a recently IPO’d tech company that is taking advantage of a market environment where the shares are being generously valued (ie. a tech bubble).

Let’s say our hypothetical tech company has IPO’d as a multi-billion dollar unicorn that has made a lot of money for the founders, early employees, and the VCs who funded the company prior to the IPO. Arguably each of these groups of people have taken large risks and have considerable portions of their own wealth, or in the case of the VCs, their investors wealth tied up in this company. 

The founders are billionaires but only on paper until they sell some their shares, early employees can finally reap the rewards of taking on high risk/stress roles common at tumultuous start up companies, and the VCs are most likely not in the business of holding public companies and need to crystalize this gain to offset losses in other investments that have failed to achieve a successful exit. 

Again, every case is different but you can see why in the case of our generously valued tech bubble company (and often still in the case of fairly or cheaply valued companies) these groups have an incentive to sell their shares as soon as they are able and without much concern for the price on any given day. Most IPOs offer less than 20% of the outstanding shares to the market so you can see how these large groups of indiscriminate sellers could create excessive volume and volatility once they are finally allowed to sell.

That volatility is precisely what makes IPO Unlocks such an interesting event to track and trade around. They can be opportunities to take advantage of spikes in volatility and write options, opportunities to take directional bets like shorts if you think that the unlock will trigger a wave of selling, and even opportunities to buy cheaply if that selling pushes the stock down to a level that you might consider the company to be cheap. 

Of course, if it always worked out that these events caused sell-offs the market would sniff that out, so it’s also important to remember that other investors and traders know about these unlocks too. If too many people position for a wave of selling that doesn’t show up, you could end up with a wave of buying as traders cover their shorts or close options trades. 

With all of these different possible outcomes how do you even start to think about trading unlocks?