A few years ago, the expiration of the 180-day lock-up on insider shares following an IPO was a surefire sign that a company's stock would go down, as venture investors got their first opportunity to sell out of generally illiquid stocks. While the situation has improved in this bull biotech market, companies coming off lock-ups still face about a 50-50 chance that their stock prices will fall in the two weeks before and after the lock-up ends.

For four U.S. IPOs completed in the first three quarters of 1999, three traded up in the week prior to the expiration of their lock-ups, when other investors used to sell ahead of the event, while only one traded down (see "Lock-up Performance"). In the week after the end of the lock-up, two were up and two were down.

The pattern has been similarly mixed for companies that have gone public since the financing window opened in the fourth quarter of 1999. Of the six companies whose lock-ups have ended, four were down in the week prior while two were up. In the week following, three were up and three were down.

Nonetheless, according to Chase H&Q banker Vivek Jain, "the effect of the lock-up is much less severe then a couple of years ago." In particular, he said biotech companies going public today are more liquid. As a consequence, pre-IPO shareholders are less anxious to sell.

CIBC World Markets banker Peter Crowley agreed. "Bigger deals this year are giving more liquidity, which could serve to stabilize the company's price near the lock-up expiration," he said. "This is a different scenario from the IPOs of the early 1990s in which companies were raising $30 million with $100 million pre-money valuations - there was much less liquidity at that time."

"Compared to five years ago, people now are sitting on a much larger gain," Lehman Brothers banker Eric Roberts added. "The increase in biotech valuations and the liquidity of the market have made it easier for private investors to sell, so they are choosing to do so at a prudent time." These days, Roberts said, "IPO lock-up expiration dates are definitely a risk, but for three out of four companies it is a non-event."

Crowley did caution that "there's been growing interest on the part of venture firms to get out earlier, and if a given IPO is beating a fund's average, the fund may dump the stock - limited partners like to see real gains."

On the other hand, Roberts said venture firms "don't want the reputation of investing and selling right away. So the VCs are selling over time and they are careful not to spook the market."

Managing the transition

Companies and underwriters also are becoming more proactive in thinking about ways to smooth the transition when large blocks of shares become available for sale. Rather than passively waiting for their stocks to get