A lock-up period is a period during which investors are unable to redeem or sell their investment shares. Hedge funds and start-ups/IPOs are two of the most common uses for lock-up periods.
The lock-up period is designed to allow hedge fund managers time to leave investments that are illiquid or that might otherwise imbalance their portfolio of investments too quickly. Hedge fund lock-ups generally last 30-90 days, allowing the hedge fund managers to leave assets without affecting the entire portfolio’s price.
Lock-periods are useful for start-ups and firms wanting to go public through an IPO because they demonstrate that the company’s leadership is still in place and the business model is still viable. It also permits the IPO issuer to have more capital on hand for future expansion.