When a company is in the startup phase, it’s common for early employees to be paid partly in stock. Early investors, too, are rewarded with a share of ownership in the company. While a company is privately held, these shares of stock are private or restricted shares. They’re governed by some restrictions. Documents must be filed with the SEC about who the private stock is being issued to. If that individual decides to sell, they must formally transfer the stock by again notifying the SEC of who the new stockholder will be.
The public stock market is a whole other ballgame. People can buy and sell shares of stock out in the open with relative anonymity. When a private company decides to go public, there is an initial public offering or IPO of shares in the company. After an IPO, the private shares of stock will become public. Often, there’s a lockup agreement in place during an IPO. This means that the private shares can’t be put onto the public market for a certain amount of time after the IPO. Lockup agreements can vary from state to state.
In most cases, early investors in a company are hoping to cash out at least partially during the IPO. Their goal has always been to reap the benefits of their investment. It’s a good idea for anyone with private stock to seek advice before selling during an IPO to ensure that their plans are in compliance with SEC guidelines. For buyers in the open market, it’s important to understand that early investors and some employees will want to sell at the end of the lockup period. This means that stock prices are likely to dip, at least in the short term, once the lockup ends and these shares are released. When supply increases, prices usually drop.
Generally, it’s expected that private shareholders will want to put some of their stock on the market during an IPO. It’s when shareholders hoard stock or release all of it that strange things start to happen to stock prices. Generally speaking, the lockup period for privately held stock is 180 days. Speaking with a securities attorney can eliminate questions about what moves to make and when to make them.