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An IPO lockup is a contract that temporarily limits specified holders from selling, transferring, pledging or otherwise hedging covered securities after an offering. A private-company valuation is an estimate for a particular security, purpose and date—not a single permanent company price. The lockup agreement and prospectus control the first question; the valuation method, evidence and Section 409A requirements control the second.
What an IPO lockup actually does
An IPO lockup is a contractual post-offering restriction. It is negotiated in the offering documents and related agreements, rather than imposed by a universal statute with one standard duration. The prospectus identifies who is restricted, which securities are covered, which transactions are prohibited, what exceptions apply and whether the underwriter can waive the restriction.
A lockup does not make shares worthless and does not necessarily cover every shareholder. It limits the actions of the holders and securities named in the documents. A person who is not a party to the agreement, or whose shares fall outside its definition of covered securities, may have different rights. Conversely, a holder may be restricted from transactions that do not look like an ordinary sale.
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One issuer prospectus filed with the U.S. Securities and Exchange Commission in 2026 states that the issuer and specified insiders are restricted for 180 days after the date of the prospectus, subject to stated exceptions and underwriter consent. Similar restrictions are expected from directors, executive officers and beneficial owners of at least 5% of outstanding common shares in that offering. That filing is evidence of one offering’s terms, not a market-wide requirement. Another IPO can use a different period, a different start date or no agreement covering a particular holder.
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Restrictions can cover more than a sale
The cited example reaches beyond an outright transfer. Its provisions cover offers, pledges, contracts and options to buy or sell, lending, other transfers and arrangements that shift the economic consequences of ownership. It also restricts certain registration statements. The exact language matters: a proposed gift, derivative hedge, loan collateral arrangement or private transfer can be treated differently from a routine market sale, or can require prior written consent.
Where to find the controlling terms
Start with the prospectus section headed Lock-Up Agreements, then read the signed lockup agreement if it is available. Use the agreement’s defined terms rather than a summary from a news article or trading discussion.
| Term to verify | Questions to answer |
|---|---|
| Start date | Does the clock begin on the prospectus date, the pricing date, the first trading day or another event? |
| Duration | How many days or months does the restriction last, and are there staged releases? |
| Covered holders | Which insiders, founders, employees, investors or entities signed, and are ownership thresholds used? |
| Covered securities | Does the definition include common shares, restricted stock, options, warrants, shares issuable on exercise or later-acquired securities? |
| Prohibited acts | Are sales, offers, pledges, loans, hedges, options, transfers and registration statements all restricted? |
| Exceptions | Are transfers to family members, trusts, affiliates, gifts, estate-planning vehicles or the issuer permitted? |
| Waiver authority | Who can provide written consent, and can the underwriter shorten or waive the lockup? |
Read exceptions together with anti-evasion language. An exception may permit a transfer only if the recipient agrees to remain bound, or only when the transfer is not for value. A waiver may be discretionary and may apply to one holder or transaction rather than everyone.
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Not if your shares and your agreement remain covered. The end of a lockup removes that contractual barrier at the stated time; it does not guarantee that a broker, exchange or securities-law rule will permit a trade. Employees and directors may still face company trading-window policies, blackout periods, insider-trading controls and other contractual restrictions. Shares can also be subject to registration, prospectus-delivery or other resale requirements that are separate from the lockup.
Before placing an order, confirm in writing with the company’s legal or compliance contact and your broker:
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- the precise release date and time zone;
- whether your particular shares are covered;
- whether an exception or waiver is required;
- whether the shares are registered or otherwise eligible for resale; and
- whether an internal trading window is open.
Do not infer that every holder can sell when the first lockup expires. Agreements can have different holder groups, separate release dates or amendments.
Do not confuse IPO lockups with every use of the term
The SEC’s Corporation Finance interpretations also discuss “lock-up agreements” in certain negotiated Rule 145 exchange transactions. That is a distinct transaction context. The existence of guidance there does not turn an IPO lockup into a standard rule, and the requirements of one context should not be imported into the other.
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A private company has no continuously observable public-market quote for its shares. A valuation is therefore an estimate made for a stated purpose and valuation date. The same company can have several valid figures at once because each figure may answer a different question.
| Figure | Question it may answer | Why it should not be substituted automatically for another figure |
|---|---|---|
| Headline company valuation | What total value was implied by a financing announcement or other public statement? | It may reflect preferred stock terms, negotiated rights and a particular transaction date. |
| Financing price | What did investors pay for the security issued in that round? | The amount paid is one factor, not an automatic value for every class or share. |
| Section 409A fair-market-value estimate | What value is used for certain U.S. employee option and stock-compensation decisions? | It must be supported by a reasonable method applied reasonably to facts and circumstances as of the valuation date. |
| Accounting fair-value estimate | What amount is needed for a financial-reporting measurement? | Accounting purpose, assumptions and unit of account can differ from a tax or financing exercise. |
The number is incomplete without its date, security and purpose. A valuation prepared in January can become stale after a financing, material operating change, market shock or expected liquidity event.
How Section 409A frames a private-stock valuation
Internal Revenue Service guidance in Internal Revenue Bulletin 2024-20 describes the standard as a reasonable application of a reasonable valuation method, with reasonableness judged from the facts and circumstances as of the valuation date. The bulletin also identifies the amount paid in a transaction as one factor under a reasonable method. It does not say that the latest preferred-share financing price automatically equals the fair market value of common stock issued to employees.
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“The determination of whether a valuation method is reasonable (or whether the application of a valuation method is reasonable) is made based on the facts and circumstances as of the valuation date.” — Internal Revenue Service, Internal Revenue Bulletin 2024-20
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This is why a startup’s 409A figure can be lower than its funding valuation without either number being inherently wrong. Preferred investors may receive liquidation preferences, conversion rights, protective provisions or other economic advantages that common shares do not have. A financing may also occur on a different date from the 409A valuation. Treating the figures as identical would ignore those differences; the conclusion is an application of the IRS standard, not a universal discount percentage.
The comparison checklist for two valuation figures
- Purpose: Identify whether each number is for option pricing, a financing, accounting, a sale, internal planning or another use.
- Valuation date: Record the date and the events known or reasonably foreseeable on that date.
- Security: Specify common stock, a preferred series, an option, a warrant, a convertible instrument or an entire-company estimate.
- Rights and restrictions: Compare liquidation preferences, conversion rights, voting rights, transfer limits, vesting and any other terms affecting economics.
- Method and evidence: Ask what reasonable method was used, what data supported it and who prepared or reviewed the analysis.
- Expected liquidity: Determine whether an IPO, sale or other change in control was reasonably anticipated at the valuation date.
If a document does not state one of these items, label it as not stated rather than filling the gap with an assumption.
When a 409A valuation can receive a presumption of reasonableness
IRS materials in Internal Revenue Bulletin 2007-19 describe a rebuttable presumption for certain illiquid startup stock. The described treatment depends on conditions, including a valuation made reasonably and in good faith, a written report, consideration of relevant factors and performance by a suitably qualified person. The presumption is rebuttable: it does not make the value permanently correct, and it does not predict what a later investor or buyer will pay.
Eligibility also has limits when an IPO or change in control is reasonably anticipated. A company approaching a liquidity event cannot assume that the same presumption applies simply because it has a recent report. This is a technical tax treatment, not an unconditional safe harbor and not a guarantee that an option price will match a future public-market price.
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How founders and employees should use the numbers
If you are receiving options
Ask for the option’s exercise price, the date of the latest 409A valuation and the class of stock underlying the option. Confirm vesting, expiration, post-termination exercise rules and tax treatment with a qualified adviser. Do not estimate potential proceeds by subtracting the exercise price from a financing headline unless the securities, dates and rights are comparable.
If you are evaluating a new financing
Separate the negotiated price per preferred share from any common-stock valuation used for compensation. Request the capitalization information, the rights attached to the new series and the date of the analysis. A higher headline valuation can coexist with a lower common-share value because the instruments are different.
If you are preparing a valuation
- Define the purpose and the exact security before selecting a method.
- Set the valuation date and collect information available as of that date.
- Document financing prices and terms as evidence, without treating them as automatic answers.
- Analyze rights, restrictions, company facts and any expected liquidity event.
- Use a qualified person and a written report when relying on the Section 409A presumption conditions.
- Refresh the analysis when material facts change or when a new valuation is required.
Comparing two lockup documents
When an issuer, investor or adviser compares agreements, use the same six axes each time:
- start date and duration;
- covered holders;
- covered securities;
- prohibited transactions;
- exceptions and conditions on permitted transfers; and
- who has authority to waive or amend the restriction.
Two documents can both be described informally as “180-day lockups” yet differ materially if one starts at pricing and the other at the prospectus date, or if one permits pledges while the other prohibits them. The operative language, not the shorthand label, determines the result.
Practical failure points
Assuming 180 days applies everywhere
Fix: Read the specific prospectus and agreement. Treat the 2026 SEC-filed 180-day example as an illustration only.
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Treating a preferred financing price as common-stock value
Fix: Compare security class, rights, restrictions and valuation date before drawing a conclusion.
Calling a presumption an unconditional safe harbor
Fix: Check the written-report, qualified-person, relevant-factor and anticipated-liquidity conditions described in the IRS materials.
Ignoring the valuation date
Fix: Tie every figure to its date and reassess after material events.
Equating lockup expiry with unrestricted trading
Fix: Check registration, broker requirements, company trading windows and other securities-law obligations separately.
Bottom line
For an IPO, the prospectus and signed lockup agreement answer who is restricted, what they cannot do, when the restriction starts and when it ends. For a private company, value is purpose-, security- and date-specific. IRS Section 409A requires a reasonable valuation method reasonably applied to the facts and circumstances; a financing price is evidence, not an automatic substitute for common-stock fair market value. Use the documents and assumptions that produced each number before comparing them or making a decision.
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