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'Friends and Family' Rules Often Lock Employees Up Longer

While friends and family in an IPO can frequently dump their shares right away, company employees often can't.

No, Virginia, buying into a friends-and-family share program is not free from risk. At least, not if you work for the company that's going public.


item here last week wondered how eager



employees would be to purchase shares in the company's pricey initial public offering. Would the worker bees at the Pittsburgh-based B2B auction house want to fork over $48 per share for their directed shares -- up from the previously expected $14 to $16 -- if they couldn't sell them for six months?

Considering that FreeMarkets shot up about sixfold after its IPO, you'd think the answer was a no-brainer. But it's a little more complex than that, at least for employees. See, while true "friends and family" -- and that includes suppliers, customers, hairdressers and the like -- can dump their shares right away, employees often can't. Those directly affiliated with the company often are subject to the same 180-day lockup on their shares purchased in the IPO as they are for shares acquired by exercising options.

And that carries risks. According to financial data firm


, of the companies that have gone public in 1999 and have been public longer than half a year, 60% are trading above their IPO price. In 1998, the performance was considerably worse: Just 35% were over their IPO price after six months. The year before, the figure was 65%.

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That makes an IPO a decent risk for employees, but a risk all the same, especially if there's a lockup provision. Personal experience is informative here:

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employees were subject to a six-month lockup on shares purchased in the May 11 IPO at 19. The shares closed Thursday at 14 3/4.

Things look considerably brighter for FreeMarkets employees, but they will have to wait almost six months to find out how much brighter. According to FreeMarkets filings with the

Securities and Exchange Commission

, all employees are prohibited from selling shares in the company as long as the underwriter-imposed lockup period remains intact. That's typically 180 days, unless the underwriter decides to end the lockup earlier.

Lockup periods are meant to protect public investors by ensuring that new shareholders aren't simply helping existing ones get rich. The restrictions also force management and major investors to focus on the longer term.

The FreeMarkets policy isn't unusual. According to a spokeswoman for

Morgan Stanley Dean Witter

, co-manager of the FreeMarkets IPO, the investment bank always prohibits company employees from selling their directed shares. "Investors would like to know that employees are in for the long haul."


Goldman Sachs

-- the other lead underwriter for FreeMarkets -- typically requires lockups for large pre-IPO shareholders, officers, directors and any other recipient of a meaningful allocation. However, Goldman doesn't lock up recipients of small allocations -- say 200 to 300 shares -- because their trading activity does not negatively impact the market and because it is very time-consuming and costly for the issuers to document the trades, a spokeswoman says.

Lockups aren't universal, of course. At

Foundry Networks


, purchasers of directed shares could sell any time, but then employees didn't get any directed shares. "Our employees already own 60% of the company," says Foundry CFO Timothy Heffner, who notes that employees are subject to a lockup on selling shares they acquire by exercising options. Ditto for advertising services supplier



, which didn't grant friends-and-family shares to any employees, it says. But AdForce did toss some extra (locked-up) shares to its directors and officers, according to its IPO filings.




, the online travel spinoff still controlled by



, employees were able to sell shares purchased in the IPO.

As for FreeMarkets, it was slowly losing steam from its first-day high of 293 before shooting up 19% Thursday to 265 1/2. Remember, though, what's relevant to employees isn't today's price. It's where things stand in early June that counts.

Webvan Delivers

Given my

history with this company, it only seemed fitting that



, the online grocery store, would be about two hours late in making its first delivery to my home. Call it poetic justice.

But given the convenience of having a super-polite delivery guy come to your home and unload the groceries, who cares about a small delay? Indeed, this was human error: The Webvan man didn't know the area well and accidentally went to the wrong door. He'll get it right next time because it will be part of his normal run.

The whole Webvan experience is reminiscent of the early


days. I recall how cool it was to order books on the Web for the first time -- and then they actually come to your doorstep. Ditto for groceries. Imagine when Webvan adds dry-cleaning, video rentals, photo-processing and the like. And the human touch of an extremely earnest guy talking about how Webvan pays his college tuition, offers benefits immediately and lets him sample the precooked meals during his training is endearing. The company has credible publicists entering every customer's home.

The other similarity to the early Amazon days is the buzz. I've spoken to many people who say they love the service, even though quite a few report long delays. Webvan's early 99% on-time delivery may permanently be a thing of the past.

What about the stock? If Webvan had started when Amazon did, perhaps it too would have soared. But this company will be spending money hand over fist for years. At 19 1/4, the stock remains over its IPO price of 15 on Nov. 5. If Webvan ever starts making money as fast as it's spending it, then it might deliver for investors as well. Until then, it'll be one of the biggest show-me Net stocks of all.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

Edie Yates assisted with the reporting of this column.