It has been plain for a while that the startup founders are in the driver's seat. The amount of funding given to U.S. startup last year was triple what they raised five years earlier. Consider that the median valuation for seed- and early-stage startups doubled over the same period.
The rise of dual-class shares gives founders with more voting power. The number of IPOs with dual-class structures likely increased between last year and the beginning of this year.
A less discussed proof point shows how far founders can push their investors in a frothy market. After a company begins to trade publicly, lock-ups are usually in place for 90 to 180 days, but are starting to disappear. Renaissance Capital, which manages IPO-focused exchange traded funds, says that early lock-up provisions exploded last year.
One-quarter of the year's IPOs had provisions that allowed for early lock-up releases. That is five times the number in 2020. Tech IPOs accounted for more than half of the new issuers with early lock-up provisions.
You might remember reading about some of the offerings, including that of Coupang. In the case of the biggest e-retailer in South Korea, it locked up 34 million of its shares just one week into its debut on the New York Stock Exchange because it needed to close at or above its IPO price. The shares are trading at roughly $26 apiece.
Employees were allowed to sell 15% of their holdings immediately and another 15% three months later when they were employed by the company.
The data warehousing company that went public in the fall of 2020 and allowed employees to sell 25% of their vested stock three months later is one of the companies that loosened lock-ups.
Dutch Bros, Allbirds, The Honest Company, TuSimple, and Affirm all had lock-up provisions.
Lock-up periods have never been required by the Securities & Exchange Commission, but they have been a good faith sign to outsiders and helped some public market shareholders plan their stock purchases. A company's shares will fall in price following a traditional lock-up as early investors unload their shares, driving up the supply of available shares. When the lockup period ended for the company, its shares dropped to 42% below their IPO price.
What is going on? A number of trends have since taken away such measures, from the longer stretch that many companies now operate as privately held concerns, to the advent of direct listings. One of the direct listings has featured a lockup.
The rise of SPACs last year is one of the factors. The New York Times reported last spring that many related deals contain language that restricts sponsors from selling shares for a year from the day the deal is completed. The lockup provision is popular because it says that if a SPAC's shares trade slightly above their initial pricing for more than 20 days in a 30-day period, the lockup provision is gone. The terms are porous sometimes. More than 20% of the company's shares were immediately traded after the merger, when Grab began to trade publicly last month.
The unifying thread is that all involve founding teams who demanded and received more flexible lock-up terms from their investors, who also benefit from the trend. What is the best way to tie a VC's hand after a public offering?
In its new report, Renaissance notes that lockups aren't just fewer in number but they're becoming more difficult to track. Early releases are now based on earnings dates or periods that are not known at the time of the IPO, instead of a simple reduction in lock-up days. The release date may be moving depending on the share price hitting a certain threshold, for example, if shares are 33% above the IPO for 10 out of 15 trading days.
It adds, "Early releases are often buried in complex legalese, and may be vague regarding the actual number of shares released."
There isn't a strong case to make why public market shareholders should care about the disappearance of lock-up periods. SPACs have performed worse than typical IPOs, but direct listings have performed better.
The U.S. stock market had a record-setting year in 2021, so investors aren't likely to push back on much until that changes.
