Market Standoff Agreement

When a firm becomes a public company, it goes through a process known as an IPO, or initial public offering. Basically, a company sells a portion of its ownership rights (known as equity) to the wider public. Following the IPO, any yahoo off the street can become partial owner (a very, very partial owner) of the firm just by buying a share on a public exchange.

However, not all the stock that gets issued as part of the IPO gets sold to public. Some gets issued to insiders...executives, investors, the janitor who was employee #15 at the firm.

The company (and the bankers running the IPO) don’t want all these insider shares hitting the market at the same time as the public stock. It might mess up the market, making all that supply available at once.

As a result of this fear, the people managing the offering rely on market standoff agreements. These deals prevent insiders from selling their IPO shares for a pre-set period of time. Basically, these deals create space for the market to soak up all the public stock first, before insiders are allowed to sell their shares.