Enhanced Lock-Up Agreement Drafting Workflow

Purpose and Strategic Context

You are tasked with drafting a comprehensive Lock-Up Agreement, a critical corporate securities document that restricts existing securityholders from selling, transferring, or disposing of their shares for a specified period following a public offering. This agreement serves as a cornerstone of market stabilization in initial public offerings and secondary offerings, preventing the immediate flood of insider shares that could undermine investor confidence and depress the newly public stock price. The lock-up period creates an essential buffer during which the market can establish fair pricing based on public trading rather than insider liquidation.

Your draft must satisfy multiple constituencies with potentially competing interests. The underwriters require robust restrictions to protect their reputation and the offering's success. The company needs enforceable provisions that won't be challenged by sophisticated securityholders. The securityholders themselves need clarity about what they can and cannot do with their holdings. Your document must balance these interests while maintaining strict compliance with securities laws, SEC guidance, stock exchange requirements, and evolving market standards for comparable offerings.

Before beginning your draft, search the user's uploaded documents to identify any existing templates, prior lock-up agreements used by the company or underwriters, the underwriting agreement that may specify lock-up requirements, the company's organizational documents and jurisdiction of incorporation, and any shareholders' agreements or other contracts that might create conflicting transfer rights. This foundational research will ensure your draft aligns with established precedent and avoids internal inconsistencies with the company's existing contractual framework.

Document Architecture and Opening Provisions

Establish the formal structure with a clear title identifying this as a "Lock-Up Agreement" unless the underwriting agreement or market practice in the relevant jurisdiction requires alternative nomenclature such as "Market Stand-Off Agreement" or "Transfer Restriction Agreement." The execution date must be precisely stated, as it serves as the reference point for calculating the lock-up period expiration and determines which version of securities laws and regulations apply to interpretation questions.

Draft the addressee section to properly identify the lead underwriter or representative of the several underwriters, including their complete legal name as it appears in the underwriting agreement, their capacity as representative of the underwriting syndicate, and their principal business address. This identification is critical because the representative holds the authority to grant waivers, approve permitted transfers, and enforce the agreement on behalf of all underwriters. Use formal business correspondence formatting with an appropriate salutation that matches the level of formality expected in securities transactions.

The preamble must establish both the factual context and the legal consideration supporting the agreement's enforceability. Identify the undersigned securityholder with sufficient specificity to avoid ambiguity, including their relationship to the company such as founder, director, officer, employee, or investor. Clearly name the company issuing securities in the public offering with its complete legal name and jurisdiction of incorporation exactly as these appear in the registration statement. Reference the underwriting agreement by date and parties, and describe the nature of the public offering including whether it involves common stock, preferred stock, or other securities, and whether this is an initial public offering or a secondary offering by existing shareholders.

The preamble should articulate that the securityholder understands the proposed public offering and acknowledges that the underwriters' agreement to purchase securities and proceed with the offering is expressly conditioned upon receiving executed lock-up agreements from founders, officers, directors, and significant securityholders. This acknowledgment establishes the consideration flowing to the securityholder—namely, the underwriters' agreement to proceed with an offering that will create liquidity and market value for the securityholder's holdings, even though that liquidity is temporarily restricted. Without this clear statement of consideration, the agreement's enforceability could be challenged as a gratuitous promise lacking mutuality.

Comprehensive Transfer Restrictions

The core restrictions must be drafted with sufficient breadth to capture every conceivable transaction that could transfer economic or legal ownership while maintaining precision that avoids unintended consequences. Begin with a clear covenant that during the lock-up period, the securityholder will not, without the prior written consent of the representative, directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock.

This prohibition must explicitly extend to shares beneficially owned by the securityholder as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, which captures shares held by entities controlled by the securityholder, shares held by family members sharing the same household, and shares over which the securityholder exercises voting or investment control. The restriction should also cover shares that may be issued upon exercise of stock options or warrants held by the securityholder, whether those options are currently vested or will vest during the lock-up period, and shares that may be issued upon conversion of convertible securities or settlement of restricted stock units.

Equally important is the prohibition on derivative and hedging transactions that transfer economic consequences of ownership without technically transferring legal title. Draft language that prohibits entry into any swap, hedge, or other agreement or any transaction that transfers, in whole or in part, directly or indirectly, any of the economic consequences of ownership of the common stock, whether any such transaction is to be settled by delivery of common stock or other securities, in cash, or otherwise. This provision prevents sophisticated financial engineering designed to circumvent the lock-up's purpose, such as equity collars, forward sale contracts, total return swaps, or other derivative arrangements that allow the securityholder to monetize their position or eliminate downside risk while technically retaining share ownership.

Address the treatment of shares acquired during the lock-up period, making clear that any shares acquired in the public offering, through open market purchases, through exercise of options or warrants, or through any other means during the lock-up period will be subject to the same restrictions as the securityholder's existing holdings. This prevents circumvention through acquisition of unrestricted shares that could then be sold while restricted shares are retained.

Lock-Up Period Specification and Extension Provisions

Define the lock-up period with mathematical precision that eliminates any possibility of ambiguity or dispute about calculation. The standard formulation specifies that the lock-up period commences on the date of the agreement's execution and continues until the date that is one hundred eighty days after the date of the final prospectus relating to the public offering, or such earlier time as the representative may agree in writing. Reference the "final prospectus" rather than the "effective date" or "pricing date" to ensure clarity, as the final prospectus date is publicly verifiable and appears in SEC filings.

Include provisions addressing automatic extension of the lock-up period in circumstances where early expiration could create market manipulation concerns or violate regulatory quiet periods. The most common extension provision addresses situations where the company issues an earnings release or announces material news or a material event relating to the company within seventeen days before or after the scheduled lock-up expiration date. In such circumstances, the lock-up period should automatically extend until the expiration of the eighteen-day period beginning on the issuance of the earnings release or the announcement of the material news or material event, unless the representative waives the extension in writing.

This extension mechanism prevents securityholders from timing announcements to benefit from information asymmetry or from selling immediately after material information is released but before the market has fully absorbed it. Draft the provision to specify that the company will notify securityholders of any event triggering an extension, but make clear that the extension operates automatically regardless of whether notice is provided, placing the burden on securityholders to monitor for triggering events rather than relying on company notification.

Carefully Calibrated Exceptions and Permitted Transfers

Draft exceptions that accommodate legitimate transfer needs while preserving the lock-up's protective function through continuation of restrictions and limitations on public disclosure. Introduce the exceptions with clear transitional language such as "Notwithstanding the foregoing, the undersigned may transfer the undersigned's common stock without the prior written consent of the representative, provided that" followed by enumerated conditions that must all be satisfied.

The first category of permitted transfers typically addresses transfers as bona fide gifts, which should be defined to exclude transfers for value or consideration and to require donative intent. Specify that such gifts may be made to charitable organizations described in Section 501(c)(3) of the Internal Revenue Code or to family members, with "family member" defined precisely to include the securityholder's spouse, domestic partner, children, grandchildren, parents, grandparents, siblings, and any lineal descendants, as well as trusts established solely for the benefit of such family members.

The second category addresses estate planning transfers, permitting transfers to any trust for the direct or indirect benefit of the securityholder or their immediate family members, or if the securityholder is a trust, to a trustor or beneficiary of the trust or to the estate of a beneficiary. Include transfers by will or the laws of descent and distribution upon the death of the securityholder, and transfers pursuant to a qualified domestic relations order or in connection with a divorce settlement, recognizing that these involuntary transfers serve important personal and legal purposes that should not be frustrated by the lock-up.

The third category addresses entity restructuring and control transfers, permitting transfers to any corporation, partnership, limited liability company, or other entity controlled by the securityholder or their immediate family members, or if the securityholder is a corporation, partnership, limited liability company, trust, or other entity, transfers to another corporation, partnership, limited liability company, trust, or other entity that is a direct or indirect affiliate of the securityholder or to any investment fund or other entity controlled or managed by the same managing member, general partner, or investment advisor as the securityholder. This exception accommodates fund restructurings, entity conversions, and transfers within commonly controlled groups without undermining the lock-up's purpose.

For each permitted transfer category, impose three critical conditions that preserve the lock-up's effectiveness. First, require that each transferee execute and deliver to the representative, prior to the transfer, a written agreement in substantially the form of the original lock-up agreement, thereby ensuring that the restrictions travel with the shares and cannot be circumvented through transfers to unrestricted parties. Second, require that if the securityholder is required to file a report under Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership during the lock-up period, the securityholder shall include a statement in such report to the effect that the transfer was made pursuant to the circumstances described in the lock-up agreement's exceptions. Third, prohibit any voluntary public disclosure or filing regarding the transfer during the lock-up period, except as required by law or regulation, preventing securityholders from using permitted transfers as a signaling mechanism that could undermine market confidence.

Consider additional exceptions that address specific circumstances common in public offerings. Permit transfers to the company in connection with the repurchase of securities from the securityholder upon termination of the securityholder's employment or service relationship with the company, pursuant to agreements under which the company has the option to repurchase such securities or a right of first refusal with respect to transfers, provided that any such repurchased securities remain subject to the lock-up restrictions. Allow the exercise of stock options or warrants to purchase common stock and the receipt of shares upon vesting or settlement of restricted stock units, provided that any shares received upon such exercise, vesting, or settlement remain subject to the lock-up restrictions and no sales of such shares occur during the lock-up period. Permit the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act, provided that no sales occur under such plan during the lock-up period and no public announcement of the plan's establishment is made during the lock-up period.

Representations, Acknowledgments, and Enforcement Mechanisms

Include comprehensive representations by the securityholder that establish their authority to enter the agreement and their understanding of its consequences. The securityholder should represent that they have full legal capacity, power, and authority to enter into the lock-up agreement and that the agreement constitutes their legal, valid, and binding obligation enforceable against them in accordance with its terms, subject only to standard exceptions for bankruptcy, insolvency, fraudulent transfer, and other laws affecting creditors' rights generally and to general principles of equity.

The securityholder should represent that the execution and delivery of the agreement and the performance of their obligations thereunder will not violate any agreement or other instrument to which they are a party or by which they are bound, and that they have not granted and will not grant any proxies or entered into or will enter into any voting agreements or other arrangements with respect to the voting or transfer of the common stock that are inconsistent with the lock-up agreement. These representations provide a basis for damages if the securityholder breaches the agreement and also create disclosure obligations that may reveal conflicts requiring resolution before the offering proceeds.

Draft provisions establishing practical enforcement mechanisms that operate independently of litigation. Specify that the securityholder agrees and consents to the entry of stop transfer instructions with the company's transfer agent and registrar against the transfer of the securityholder's shares except in compliance with the lock-up agreement. The securityholder should acknowledge that the company may refuse to register any transfer of securities not made in accordance with the agreement's provisions, may cause the transfer agent to decline to register any such transfer, and may place restrictive legends on certificates representing the restricted securities.

Include an acknowledgment that the securityholder understands that the company and the underwriters are proceeding with the public offering in reliance upon the lock-up agreement, that the agreement is irrevocable, and that the restrictions are necessary and appropriate to protect the interests of the company and the investing public. This acknowledgment strengthens the agreement's enforceability by demonstrating the securityholder's informed consent and understanding of the business purposes underlying the restrictions.

Third-Party Beneficiary Rights and Waiver Provisions

Explicitly designate the underwriters as third-party beneficiaries of the lock-up agreement with direct enforcement rights against the securityholder. Draft language stating that the underwriters are intended third-party beneficiaries of the agreement and that the agreement may be enforced by the representative on behalf of the underwriters, in addition to enforcement by the company. This provision is critical because it allows the underwriters to seek injunctive relief or damages directly without requiring the company to act as an intermediary, which is particularly important if the company is reluctant to sue its own founders, officers, or directors.

Address the representative's discretionary authority to waive or modify the lock-up restrictions, making clear that the representative may in its sole discretion and at any time without notice release all or any portion of the securities subject to the lock-up agreement. Specify whether such releases must be granted on a pro rata basis to all securityholders subject to similar lock-up agreements or whether the representative may grant selective releases. Market practice increasingly favors pro rata release provisions to avoid preferential treatment, but underwriters often retain discretion to release securities in connection with specific circumstances such as secondary offerings, estate planning needs, or financial hardship.

If the agreement includes provisions for automatic early release under specified circumstances, draft these with precision to avoid unintended consequences. For example, some lock-up agreements provide that if the representative releases officers or directors from their lock-up obligations, then all securityholders are automatically released on a pro rata basis. Such provisions should specify the triggering conditions clearly, the calculation methodology for pro rata releases, notice requirements, and whether the automatic release applies only to voluntary releases or also to releases granted in connection with secondary offerings or other specific transactions.

Governing Law, Jurisdiction, and Procedural Provisions

Specify the governing law that will apply to the interpretation and enforcement of the agreement, typically selecting the law of the state where the company is incorporated, where the underwriters maintain their principal place of business, or where the offering is being conducted. The choice of law provision should state that the agreement shall be governed by and construed in accordance with the laws of the specified state without regard to its conflict of laws principles, thereby preventing application of another jurisdiction's laws through conflict of laws analysis.

Include a jurisdiction and venue provision that establishes where disputes must be litigated, specifying whether the parties consent to exclusive jurisdiction in the state and federal courts located in a particular jurisdiction or whether jurisdiction is non-exclusive. Given the time-sensitive nature of lock-up enforcement, consider including a consent to expedited proceedings and preliminary injunctive relief, with the securityholder acknowledging that monetary damages would be inadequate to compensate for breach and that the company and underwriters are entitled to specific performance and injunctive relief without posting bond.

Address amendment and modification procedures, specifying that the agreement may not be amended or modified except by a written instrument executed by the securityholder and the representative. Include a provision stating that no waiver of any provision of the agreement shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced, and that no failure or delay in exercising any right, power, or privilege shall operate as a waiver thereof.

Draft a severability provision stating that if any provision of the agreement is held to be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not be affected or impaired, and the parties shall negotiate in good faith to replace the invalid provision with a valid provision that achieves the same economic effect. Include standard provisions addressing counterpart execution, electronic signatures, and the effectiveness of facsimile or PDF signatures, which are particularly important given the volume of lock-up agreements that must be executed in connection with public offerings.

Signature Execution and Capacity Considerations

Conclude with a formal signature block appropriate to the securityholder's status as an individual or entity. For individual securityholders, include a complimentary close such as "Very truly yours," followed by a signature line, printed name line, and date line. If the individual is signing in a representative capacity such as trustee of a trust or custodian of an account, include a title line that identifies the capacity in which they are signing.

For entity securityholders, the signature block must identify the type of entity, include the entity's complete legal name, provide a signature line for an authorized officer or representative, include a line for the printed name and title of the signatory, and include a date line. Consider whether the agreement should include representations regarding the signatory's authority to bind the entity, such as a statement that the signatory is duly authorized to execute the agreement on behalf of the entity and that no further corporate, partnership, or other action is required to authorize the execution and delivery of the agreement.

For entities, consider whether additional documentation should be required as exhibits or attachments, such as board resolutions authorizing execution of the agreement, certificates of incumbency identifying authorized signatories, or opinions of counsel regarding due authorization and enforceability. While such documentation is less common for routine lock-up agreements than for major commercial contracts, it may be appropriate for significant institutional investors or complex entity structures where authority questions could arise.

Strategic Coordination and Compliance Verification

Before finalizing your draft, verify alignment with the underwriting agreement's requirements regarding lock-up provisions, including the specified lock-up period, any required exceptions or permitted transfers, provisions for early release or extension, and the form of agreement that must be used. Search the uploaded documents for the underwriting agreement and any exhibits specifying the required form of lock-up agreement to ensure your draft satisfies the underwriters' conditions to closing.

Identify and resolve potential conflicts with existing contractual obligations by searching for shareholders' agreements, voting agreements, registration rights agreements, stock restriction agreements, and employment agreements that may grant transfer rights, registration rights, or other rights inconsistent with the lock-up restrictions. If conflicts exist, coordinate with counsel to determine whether amendments to existing agreements are necessary, whether the lock-up agreement should include specific carve-outs for pre-existing contractual rights, or whether waivers must be obtained from other parties to those agreements.

Verify that the lock-up period and terms align with current market standards for comparable offerings by researching recent public offerings in the same industry, of similar size, and in the same market conditions. Lock-up periods that are significantly longer or shorter than market norms may raise questions from investors or create negotiation issues with securityholders. Similarly, exceptions that are more restrictive than market practice may face resistance, while exceptions that are more permissive than standard may concern underwriters.

Ensure comprehensive coverage of all forms of equity compensation by identifying all outstanding stock options, restricted stock units, performance shares, stock appreciation rights, phantom stock, and other equity awards that may vest, become exercisable, or settle during the lock-up period. The agreement should clearly address whether the lock-up applies to the awards themselves, to shares acquired upon exercise or settlement, or both, and should specify the treatment of net settlement arrangements where shares are withheld for tax purposes.

Consider whether the agreement should include specific provisions addressing shares acquired through the company's employee stock purchase plan, shares acquired through dividend reinvestment, or shares acquired through other ongoing equity programs that may operate during the lock-up period. Draft these provisions to prevent circumvention while accommodating legitimate ongoing compensation and benefit programs that serve important employee retention and motivation purposes.

Your final draft should be a comprehensive, enforceable instrument that protects all parties' interests while providing clear guidance to securityholders about their obligations and rights during the critical post-offering period when market stability is most vulnerable to insider selling pressure.