Selling Stockholders

Existing stockholders may wish, and in fact may have contractual registration rights, to sell shares of company common stock they own in the IPO. The company and the un- derwriters should address this issue, which can be quite sensitive, early in the registration process. Some founders and officers may have a substantial portion of their net worth in company stockholdings. Often they have sacrificed for years to build a successful company and understandably may wish to “take some chips off the table” by selling some stock to raise cash. Underwriters may be concerned that allowing stockholders, especially officers or founders, to sell in the IPO may be perceived as insiders “bailing out” because of doubts about the company’s prospects. However, if the company is willing to permit existing stockholders to sell and the underwriters are eager to please both the company and the selling stockholders, and particularly if the market for the issue is “hot,” selling stockhold- ers may be included in the offering, in some cases as the seller of the shares subject to the underwriters’ over-allotment option.

Participation of selling stockholders in the IPO requires additional offering arrange- ments. To ensure a smooth process, the selling stockholders will be asked to sign a power of attorney assigning to at least one attorney-in-fact the authority to negotiate and sign the underwriting agreement on behalf of the selling stockholders. Selling stockholders will also be asked to surrender their stock certificates to a custodian, who will deliver the certificates for transfer at the closing of the offering.


Underwriters use “lockup” agreements as a means to help stabilize trading in the com- pany’s common stock following the IPO. Typically, the underwriters will require the com- pany and its directors, officers and stockholders to enter lockup agreements in which they agree not to sell, transfer or otherwise dispose of any common stock they own for a period of time, typically ending 180 days after the closing, without the underwriters’ consent. If the company and underwriters agree to offer a directed share or “friends and family” pro- gram (discussed below), participants in the program also will be required to sign a lockup agreement. The underwriters will require that most, if not all, of the lockup agreements be



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