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Ask a Lawyer: Stock Options and Lock-Up Agreements - ThinkstockPhotos-453216749-c.jpg

Ask a Lawyer: Stock options and lock-up agreements

Jim Cramer wasn’t available this week, unfortunately

Each week, we invite a few guest attorneys to our Facebook page to answer questions from our users. This past Wednesday, we got questions about evictions in Georgia, terms and conditions in a formal contract, and even one about the law in India. (For the record, our guest attorneys know American law, so they had to pass on that one.)

Out highlight this time around involves stock options and lock-agreements. Our guest attorney explained why they exist and what they do. If you own a startup or work at one, this is a response you might want to take a look at.


Are you obligated to sign a lock-up agreement if you received stock options as an employee but no longer work at the company that issued you those options?

It’s fairly standard for a company to ask former employees to sign a lock-up agreement prior to the initial public offering (“IPO”).  A lock-up agreement prohibits company insiders, such as employees and venture capitalists, from selling their shares for a set period of time. 180 days is a typical time period for a lock-up agreement. As you can imagine, if all pre-IPO stockholders sell their stock immediately following an IPO, this could really sabotage early trading in the shares.

That said, you should check the agreements you signed when you purchased your stock from your [now] former employer. That agreement may require you to sign the lock-up agreement. If not, and if you are no longer affiliated with the company, you may not have to sign.  But, each state has its own securities laws and rules (known as “Blue Sky Laws”), so you should also check these before making any decisions.

Keep in mind that if you don’t sign the lock-up agreement, the company may not be very helpful if you decide to sell your stock. Your stock is probably restricted if you got it through an employee stock benefit plan.  Restricted stock certificates almost always are stamped “restricted” on the legend. A broker is not going to work with you unless you can establish that you’re in compliance with Rule 144 of the Securities Act, which applies to restricted securities.  Rule 144 permits the public resale of restricted securities if a number of conditions are met, including how long the securities are held, the way in which they are sold, and the amount that can be sold at any one time.

Even if you’ve met the conditions of the rule, you still won’t be able to sell your stock to the public until you get the restrictive legend removed from the certificate, and only a transfer agent may do that. The agent won’t remove the legend unless you’ve obtained consent of the issuer, which could be a problem if you refused to sign the lock-up agreement.

If you do sign the lock-up agreement, the underwriters will probably have programs designed to help you sell the stock after the lock-up period expires. Check out the SEC’s website – it’s a good resource when researching stock question:   http://www.sec.gov/answers/lockup.htm

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