What is a market standoff provision?
Takeaway: A "market standoff" is a standard provision that legally obligates all stockholders, including founders and employees, to not sell any of their shares for a set period—typically 180 days—following an IPO, a requirement universally demanded by underwriters to ensure an orderly public offering.
Your company has had a successful Initial Public Offering (IPO). Your stock is now trading on the NASDAQ. For the first time, your founders, employees, and early investors have a liquid market for their shares. However, they cannot all rush to sell their stock on day one. A massive, coordinated sell-off by insiders would crater the stock price and destroy the confidence of the new public market investors.
To prevent this, every single stockholder in your company will be subject to a "lock-up" period. The legal mechanism that contractually obligates everyone to agree to this future lock-up is a market standoff provision, and it is included in nearly every venture financing agreement.
What is a Market Standoff Provision?
A market standoff provision is a clause found in the Investors' Rights Agreement (and also in your standard Stock Option Agreement) where each stockholder agrees in advance that, if requested by the company and its investment bank underwriters, they will not sell or transfer any of their shares for a specific period of time immediately following an IPO.
The Standard Period: The lock-up period is almost universally 180 days.
Who It Applies To: This provision applies to all significant stockholders, including the founders and all of your venture capital investors. It creates a level playing field and ensures that no one gets to sell before anyone else.
Why is it So Important for an IPO?
The market standoff (or lock-up) is an absolute requirement from the investment bankers who underwrite the IPO.
It Ensures an Orderly Market: The lock-up prevents a flood of insider shares from hitting the market immediately after the IPO, which would overwhelm demand and cause the stock price to collapse. It creates a stable and orderly trading environment for the first six months of the company's life as a public entity.
It Signals Confidence: It signals to the new public market investors that the company's insiders have long-term conviction in the business and are not simply looking to cash out at the earliest possible moment.
A Contractual Prerequisite
The market standoff is not something you negotiate at the time of the IPO. It is a contractual promise that every stockholder makes years in advance, as a condition of receiving their stock or options. Your venture investors will insist that this provision is included in all the financing agreements and that it is applied to every single person on your cap table.
It is a fundamental and non-negotiable part of the legal architecture required to prepare a private, venture-backed company for a successful transition to the public markets.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.