Twilio's Lock-Up Expiration Explained

Twilio Inc TWLO shares were volatile Friday morning, swinging from positive to negative territory and back again as traders and investors seemed to show confusion related to the timing of the company's IPO lock-up expiration.

On Thursday, Twilio shares notably rallied about 5 percent.

What Is An IPO Lock-Up Expiration?

A period of between 90 and 180 days which prevent company insiders and large shareholders who were involved in the initial public offering from selling a portion of their holdings. 

In some cases, the expiration of a lock-up period results in downside in share price as investors took profits or, if the IPO didn't go so well, cut losses.

So What Happened With Twilio?

Twilio, which officially began trading publicly on June 23, 2016, was scheduled for two lock-up periods to expire:

• On December 20, 2016 for 31 million shares
• On January 19, 2017 for the remainder of the shares issued via the IPO.

Now here's the key: of the remaining 36 million shares to be opened on January 19, only 5 million shares were eligible for sale because of a corporate black-out period imposed amid Twilio's fourth-quarter earnings report.

Black-out periods are commonly imposed around a corporation's quarterly earnings report in order to prevent transactions. In the case of Twilio, the company's final lock-up period expiration and its black-out period overlapped, thus pushing back the lock-up date til after earnings.

How You Can Play This?

While Twilio shares held up rather well by Friday's afternoon session (down about 2.7 percent), the unlocking of insider shares, as mentioned above, has caused selling pressure in IPO names.

• Twitter Inc TWTR - In May 2014, shares fell by nearly 18 percent on record volume, bringing the stock to a new (at the time) all-time low.
• Fitbit Inc FIT - In February, shares dropped 8 percent as shares locked up for the IPO became available for sale.