Lock-Up Period Agreements

𝗖𝗮𝗻 𝘆𝗼𝘂𝗿 𝗲𝗺𝗽𝗹𝗼𝘆𝗲𝗿 𝗹𝗲𝗴𝗮𝗹𝗹𝘆 𝗰𝗵𝗮𝗶𝗻 𝘆𝗼𝘂 𝘁𝗼 𝘆𝗼𝘂𝗿 𝗱𝗲𝘀𝗸 𝗱𝘂𝗿𝗶𝗻𝗴 𝘁𝗵𝗲 𝗹𝗼𝗰𝗸-𝗶𝗻 𝗽𝗲𝗿𝗶𝗼𝗱? This question was dealt by the Delhi HC in a case involving 𝙇𝙞𝙡𝙮 𝙋𝙖𝙘𝙠𝙚𝙧𝙨 𝙋𝙫𝙩. 𝙇𝙩𝙙. and one of its employees, 𝙑𝙖𝙞𝙨𝙝𝙣𝙖𝙫𝙞 𝙑𝙞𝙟𝙖𝙮 𝙐𝙢𝙖𝙠. ➤ 𝗪𝗵𝗮𝘁 𝗛𝗮𝗽𝗽𝗲𝗻𝗲𝗱? ↳ Lily Packers, took offence when Vaishnavi decided to leave her position as a fashion designer before completing the agreed three-year lock-in period. ↳ The company, fearing breaches of confidentiality and other contractual obligations, sought arbitration to resolve the dispute. ↳ The issue of whether a lock-in period in an employment agreement is arbitrable or not was raised before the Delhi HC. ↳ The Delhi HC while affirming the arbitrability of such a clause discussed the issue of validity and enforceability of lock-in periods. ➤ 𝗧𝗵𝗲 𝗩𝗲𝗿𝗱𝗶𝗰𝘁 ↳ The court ruled that the lock-in clauses are valid contractual agreements and they do not violate fundamental rights. ↳ Such clauses are in nature of  ‘lawful and reasonable covenants’. ↳ The court also noted that these provisions are essential for employer stability, particularly when significant resources are spent on training employees. ↳ Furthermore, the court held that such provisions are like the backbone of a healthy work environment—necessary for the stability and growth of the employer while offering clarity to employees. ➤ 𝗟𝗲𝗴𝗮𝗹 𝗣𝗲𝗿𝘀𝗽𝗲𝗰𝘁𝗶𝘃𝗲 ↳ Questions often arise about whether lock-in periods infringe on the employees' freedom to work as protected by 𝘼𝙧𝙩𝙞𝙘𝙡𝙚 𝟭𝟵 𝙤𝙛 𝙩𝙝𝙚 𝙄𝙣𝙙𝙞𝙖𝙣 𝘾𝙤𝙣𝙨𝙩𝙞𝙩𝙪𝙩𝙞𝙤𝙣 and 𝙎𝙚𝙘𝙩𝙞𝙤𝙣 𝟮𝟳 𝙤𝙛 𝙩𝙝𝙚 𝙄𝙣𝙙𝙞𝙖𝙣 𝘾𝙤𝙣𝙩𝙧𝙖𝙘𝙩 𝘼𝙘𝙩, 𝟭𝟴𝟳𝟮. ↳ Section 27 generally renders agreements in restraint of trade void, but the court clarified that such restrictions during employment are not contrary to law. ↳ The court leaned on previous cases like 𝘉𝘳𝘢𝘩𝘮𝘢𝘱𝘶𝘵𝘳𝘢 𝘛𝘦𝘢 𝘊𝘰. 𝘓𝘵𝘥. v. 𝘚𝘤𝘢𝘳𝘵𝘩 (1885) and 𝘕𝘪𝘳𝘢𝘯𝘫𝘢𝘯 𝘚𝘩𝘢𝘯𝘬𝘢𝘳 𝘎𝘰𝘭𝘪𝘬𝘢𝘳𝘪 v. 𝘊𝘦𝘯𝘵𝘶𝘳𝘺 𝘚𝘱𝘪𝘯𝘯𝘪𝘯𝘨 & 𝘔𝘢𝘯𝘶𝘧𝘢𝘤𝘵𝘶𝘳𝘪𝘯𝘨 𝘊𝘰. (1967) to establish that in-employment restrictions are generally lawful, while post-employment ones can be problematic. ➤ 𝗣𝗿𝗮𝗰𝘁𝗶𝗰𝗮𝗹 𝗜𝗺𝗽𝗹𝗶𝗰𝗮𝘁𝗶𝗼𝗻𝘀 In this case, the lock-in period meant that Vaishnavi committed to staying with Lily Packers for a specific duration, ensuring that the company’s investment in her training would not be wasted. The court pointed out that such terms are typically negotiated and agreed upon voluntarily, providing clarity and protection for both parties. 𝗜𝗳 𝘆𝗼𝘂’𝗿𝗲 𝗮𝗯𝗼𝘂𝘁 𝘁𝗼 𝘀𝗶𝗴𝗻 𝗮 𝗰𝗼𝗻𝘁𝗿𝗮𝗰𝘁 𝘄𝗶𝘁𝗵 𝘀𝘂𝗰𝗵 𝗮 𝗰𝗹𝗮𝘂𝘀𝗲, 𝘁𝗮𝗸𝗲 𝗮 𝗺𝗼𝗺𝗲𝗻𝘁 𝘁𝗼 𝗿𝗲𝗮𝗱 𝗶𝘁 𝗰𝗹𝗼𝘀𝗲𝗹𝘆 𝗮𝗻𝗱 𝘂𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱 𝘄𝗵𝗮𝘁 𝗶𝘁 𝗺𝗲𝗮𝗻𝘀 𝗳𝗼𝗿 𝘆𝗼𝘂.

Hidden Lock-in clauses in a Contract Majority of the contracts won’t say “lock-in period.” But that doesn’t mean you would not be stuck. Here are some sneaky ways contracts lock you in, without ever using those words: 1. No termination for convenience: You can only exit if the other side messes up. If they don’t? You’re stuck till the end. 2. Auto-renewals with tight notice windows: The contract says it's valid for 1 year, but quietly auto-renews unless you give 90 days’ written notice before it ends. Miss the notice window = another year added. 3. Hefty early exit fees: You’re allowed to leave the contract in between, but only if you pay 6 months’ worth of charges. That’s a lock-in wearing a price tag. 4. Minimum commitments: The contract says you must buy 100 units every month, even if you only need 40. You’re paying for more than you actually use, with no refund or flexibility. 5. Upfront discounts that claw back: You got a benefit upfront, but leave early, and you have to return it. Basically: A "gift" that turns into a bill if you leave. 6. Notice + cure periods before termination: Even when you can exit, you have to wait. 30 days’ notice + 30 days for them to “fix” things = 2-month cooling-off before you’re free. Bottom line: Don’t search for the word ‘termination' only. Ask: Can I walk away if I need to? If not, there’s a lock-in hiding in formal language that needs to be taken care of. #contractreview #inhousecounsel

Beware of contracts with long terms and evergreen clauses. Recently I went to sign what looked like a simple one-page agreement for some new equipment (about $5,000). The T&C weren’t even on the page — they were hidden behind a link. Once I dug in, I found out that making this “minor” change would actually reset our entire contract (this is an annual agreement for more than $200K), locking us in for another 36 months, plus automatic 12-month renewals unless we gave written notice in a very tight annual window. Last week, for one of my clients, I reviewed another contract that had a 5-year renewal with evergreen provisions. Five years! This wasn't a brand new contract from the ground up, we were just adding some features to some software. Here’s the problem: once you’re locked in, you’ve lost your leverage. If the vendor raises prices, adds new “junk fees,” or simply provides lousy service, you’re stuck. And they know it. These contracts are designed to eliminate your ability to walk away, which means there’s little incentive for the vendor to keep earning your business every month. It also strangles innovation. Technology and systems change fast in our industry, but if you’re chained to a 3- or 5-year agreement, you can’t pivot when a better solution comes along. That’s how dealers end up stuck with outdated tools, poor support, and higher costs, all while competitors move forward with something better. What’s wrong with these vendors? I get that there are upfront costs, but if you build a quality product and deliver strong customer service, you shouldn’t need to trap dealers into multi-year commitments. A 12-month initial term followed by month-to-month renewals should be more than enough if you’re confident in what you’re selling. So let’s call it what it is: if your service is so shaky that you need indentured customers just to survive, maybe the problem isn’t your customers — it’s you. These are the kinds of awareness the National Powersports Dealer Association is attempting to bring to dealers across the nation. If you aren't a member, then please consider joining. #Contracts #EvergreenClauses #VendorRelationships #DealerAdvocacy #Powersports #SmallBusiness #BusinessRisks #ReadTheFinePrint #CustomerExperience #TrustOverTraps #DealerStrong

Concentrated, long-only equity strategies: how do you secure multi-year capital without overreaching on terms? I had this discussion with a manager recently, and it surfaced a few principles worth debating. The manager had reached out with the narrower question on investor level-gates on redemptions after a multi-year lock. That provoked a larger discussion on terms, with some key principles I shared below. 𝗠𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁 𝗙𝗲𝗲𝘀: Should be sufficient to fully and thoughtfully resource the firm to execute on the mandate. Spending of this type is in an investor’s interest. Conversely, fees beyond this level reduce alignment. 𝗜𝗻𝗰𝗲𝗻𝘁𝗶𝘃𝗲 𝗙𝗲𝗲𝘀: Should reward material value creation. Value over what? A relevant index. As a CIO, I hire you to be long beta and my cost of capital is indexed exposure. Beat the index in an up or down market and that’s worth a share. The calculation period should align with lock-ups (e.g. rolling 3 years if three year lock-up) and include a high watermark. 𝗟𝗼𝗰𝗸-𝘂𝗽𝘀: Should map to the natural holding period of your strategy. If you take a multi-year view and average 3 year holds, then a 2-3 year lock is not unreasonable. This assures you don't get rug-pulled for short term results and that LPs are here for the actual thesis. 𝗡𝗼𝘁𝗶𝗰𝗲 𝗽𝗲𝗿𝗶𝗼𝗱𝘀: Should map to the time needed to generate liquidity in your names in a stressed market.  𝗚𝗮𝘁𝗲𝘀: Investor-level gates often feel redundant or punitive. If you’ve taken care of the time-to-liquidity with your notice period, let your departing investors just leave. Same for fund-level gates, but with the standard exception for extreme markets that materially change time-to-liquidity. 𝗥𝗲𝗹𝗲𝗮𝘀𝗲 𝘃𝗮𝗹𝘃𝗲: If there is a multi-year lock, giving LPs a small 5-10% liquidity provision each year is good for everyone. They get to rebalance/meet payout and you don’t get a single big redemption if that is their only option. 𝗠𝗲𝗹𝘁𝗶𝗻𝗴 𝗳𝗲𝗲𝘀: As firms scale and the management fees become a distractingly large profit center, fund managers can commit to reducing the fee burden on all LPs as AUM grows past big milestones. Alternatively, I was once pleasantly surprised as a CIO when our largest investment called with a pre-emptive 25bps fee cut because we had been clients over five years. These terms should all work in concert with each other. LPs balk not as much at high fees as misaligned or incongruous fees. Getting terms right has broad implications ➡️ Being competitive in recruiting and compensating your team  ➡️ Signaling priorities to LPs  ➡️ Screening out LPs who might not be aligned with the approach ➡️ Assuring LPs know they are amidst like-minded co-investors. Newer firms should expect to horse-trade and, at times, settle on having more than one fee structure (not ideal, but sometimes a business imperative). Reasonable minds can disagree on these things, so I’ll look forward to comments others will add.

Investment Fund Key Terms, Part 12: LP Withdrawals Can investors withdraw from a fund whenever they want? No! In most private funds, investors commit capital for the long haul. But not all funds are structured the same. The rules on LP withdrawals depend on whether the fund is closed-end or open-end. Let’s examine both. 🔒 Closed-End Funds: No Withdrawals In a traditional closed-end fund — like a private equity, venture, or real estate fund — LPs make a capital commitment and remain invested until the fund winds down. That’s because these funds invest in illiquid, long-term assets. Allowing withdrawals would force the GP to sell assets prematurely, disrupting returns and fairness across investors. 💬 Example: “No Limited Partner shall have the right to withdraw capital or require redemption of its Interests, except as required by law or as permitted by the General Partner in its sole discretion.” As a result, LPs get their money back only through: 1️⃣ Distributions from realized investments 2️⃣ Liquidation at the end of the fund’s term The illiquidity is part of the design — it gives the GP time to execute the investment strategy without worrying about redemptions. ♻️Open-End Funds: Periodic Liquidity (with Gates & Lockups) Open-end funds are different. They’re designed for ongoing subscriptions and redemptions, often used by credit, hedge, or other evergreen vehicles. But liquidity still comes with guardrails. Typical features include: 🔒 Lock-up periods: Investors can’t redeem for the first 12–36 months after investing. 🔒 Redemption notice: LPs must give 30–90 days’ notice before withdrawal. 🔒 Gates: The fund can limit redemptions — for example, to 5–25% of NAV per quarter — if too many LPs want to exit at once. 🔒 Suspensions: The GP can temporarily suspend withdrawals during market stress or valuation uncertainty. These mechanisms protect the fund from a “run on the bank” while still offering periodic liquidity. In general, the *less* liquid the asset class, the more strict the redemption restrictions. So a public equities fund would have softer restrictions than a real estate fund. 🗓️ Next up in Part 13: Key Person Event

Whether a lock-in period in employment contracts is valid in law or does it violate the fundamental rights enshrined in the Constitution of India? In the case on hand three important issues are resolved by the hon. Court. They are: 1.     Whether a lock-in period in employment contracts is valid in law 2.     Whether such contracts violate the fundamental rights enshrined in the Constitution of India? 3.     Whether disputes relating to a lock-in period in employment contracts are arbitrable In this case a few employees joined the company in different positions and agreed to serve the company for a minimum period of 3 years after completion of their probation period. However, employer reserved his right to end the employment on his discretion either during the lock in period or thereafter. However, employees abandoned the service on one or the other reason without completing the stipulated period of service. Employer filed the complaint demanding liquidated damages with a request for arbitration as contained in the letter of appointment Employees refused to appear before the arbitration and argued that such lock-in period in appointment are contrary to law and in violation of the fundamental rights of life and employment and issues involving violation of fundamental rights are not arbitrable and hence the present dispute is not liable to be adjudicated. After relying the decisions of various high courts and that of Supreme Court the court held that: Employment agreements that provide for a lock-in period for the employees are legal and does not violate the Fundamental Rights as enshrined in the Constitution of India. Further the court observed that principles with regard to the validity of covenants in employment contracts are well settled. Any reasonable covenant operating during the term of the employment agreement such as lock in period would be valid and lawful. It cannot, therefore, be argued that in the present cases there is a violation of any Fundamental Right as enshrined in the Constitution of India. It is also noted that such clauses in employment contracts may in fact be necessary for the health of the employer institution as it provides the required stability and strength to the employer institution and its framework. It also reduces the employee attrition levels- The court said. It is further observed that employment contracts in general are contractual disputes and not disputes which raise issues of violation of fundamental rights, in such fact situations. There may be certain employment conditions which could be considered unreasonable curtailment of the employee’s right to employment but a 3-year period of lock-in cannot be held to be such a condition. And as such the same issues are arbitrable. High Court of Delhi in the case of Lily Packers P Limited Vs Vaishnavi Vijay Umak and others, decided on 11 July 2024 Nataraj Author MRN/LA/96/31.7.24

The importance of a Cofounder Agreement Back in April 2017, I started my first startup with a close friend from college. We had known each other for about 4 years and started off on a positive note, incorporating a company with an equal 50/50 split. Soon after, we got incubated at SINE, IIT Bombay’s startup incubator. As part of the process, SINE made it mandatory for us to sign a Cofounder Agreement. At that time, we were just a few months out of college and didn’t fully appreciate its value. We googled a format, customised it, and signed. One of the clauses was about a lock-in period: "The Founders hereby agree that the shares held by them in the Company shall be locked in for a period of [] years ("Lock-in Period") from the Execution Date..." We decided to put 2 years as the lock-in period, without giving it much thought. This agreement was signed on 29th July 2017. Fast forward to 6th August 2018, barely a year later, my cofounder quit. At that time, he owned ~50% of the company. The only reason I could save the company was because of that lock-in clause. Without it, half the company would have gone to someone who had already exited. That experience taught me a few lessons: 1. Legal agreements can be lifesavers when things go wrong. 2. Not everyone thinks long-term. 3. People can quit abruptly without notice. Since then, I’ve always been very particular about legal agreements, especially termination and lock-in clauses. They protect not just you, but also your team, customers, and investors. If you’re running a startup and haven’t signed a Cofounder Agreement yet, please do it now. It’s one of the best favours you can do for your future self. #startups #business #entrepreneurship

Key Clauses in a Co-Founder Agreement: Safeguarding Your Startup If you're running a startup with a co-founder, not having a co-founder's agreement in place is a risky move. However, if you're a savvy founder entering into such an agreement, there are several critical clauses you must ensure are included. Among them, two clauses stand out for their importance: Intellectual Property (IP) Ownership Clause: This clause determines who will own the intellectual property created by the startup. Ideally, it should clearly state that the ownership of all IP resides with the company, not with any individual co-founder. This is important because, in the unfortunate event of a fallout between co-founders, IP ownership disputes can cripple the startup's operations. By vesting IP ownership in the company, you ensure that the startup’s assets remain intact, independent of individual co-founders. Lock-In Period Clause: Another critical clause is the lock-in period, which prevents co-founders from selling or transferring their shares for a specified duration, often ranging from one to three years. This restriction is vital for ensuring stability within the startup, as it prevents co-founders from abruptly leaving the venture. It also offers confidence to investors, assuring them that the core team is committed to the company's growth for the foreseeable future. Including these clauses not only protects the startup's assets but also fosters long-term stability, both internally and externally, with investors. #StartupLaw #CoFounderAgreement #IntellectualProperty #IPLaw #LockInPeriod #BusinessStability #Entrepreneurship #StartupFounders #LegalAdvice #StartupStrategy #InvestorRelations

What really happens after an IPO lists? Let’s talk about lock-up expiry. When a company goes public, not everyone is free to sell their shares immediately. In simple terms, a lock-up restricts certain investors from selling their holdings for a defined period after the IPO. Why? Because SEBI wants insiders to have real skin in the game, not just at the time of fundraising, but after listing as well. So why does India have lock-in rules? They exist to prevent a messy post-IPO situation. Lock-ins help by: - Avoiding immediate dumping of shares - Ensuring promoters stay committed to the business - Aligning insiders with public shareholders - Reducing post-listing volatility - Improving overall confidence in the IPO Now, here’s how lock-in periods differ across investors in India: 1. Promoters The idea is simple: promoters should not raise money and exit quickly. - Minimum 20% of post-issue capital: locked in for 3 years - Remaining promoter holding: locked in for 1 year 2. Pre-IPO Investors (PE / VC / Strategic investors) This is the most closely tracked lock-up expiry. Markets watch this closely because funds may look to book partial exits. - Shares held before IPO: locked in for 6 months (180 days) 3. Anchor Investors Anchor lock-in expiries often bring short-term price volatility. - 50% of anchor shares: locked in for 30 days - Remaining 50%: locked in for 90 days 4. QIBs / NIIs / Retail investors - No lock-in - Shares can be sold from the listing day itself Bottom line: Lock-up expiries don’t change a company’s fundamentals. But they do affect supply, sentiment, and short-term price action.

A Malaysian logistics company was sold for RM 5,000,000. The agreement was signed. Bank financing was being arranged. Completion was three months away. During those three months, the seller purchased a RM 350,000 vehicle under the company name and paid RM 150,000 in discretionary bonuses to family members on the payroll. When the buyer's lawyers reviewed the accounts immediately before completion, the company's net asset value had declined by RM 500,000 from the signing date. The buyer refused to complete at the agreed price. The dispute turned entirely on what the sale agreement said about the seller's obligations during the gap period. Once a share sale agreement is signed, the seller's freedom to operate the company is constrained by the ordinary course of business covenants in that agreement. Spending outside normal operations without the buyer's written consent is a breach of those covenants, regardless of whether the seller is still the registered owner of the shares. In practice, lawyers structure the gap period through two pricing approaches that handle this problem differently. The completion accounts mechanism prices the transaction based on a balance sheet drawn on the actual handover date. The final price adjusts up or down from the headline figure based on those accounts. This protects the buyer against value lost during the gap period but introduces post-completion price adjustment disputes that are common in Malaysian SME transactions and expensive to resolve. The locked-box mechanism fixes the price based on a balance sheet from an agreed historical date, typically the most recent audited accounts. Any value leaving the company after that date is categorised as leakage, meaning money or assets exiting the company that should not. Normal salary and agreed operational expenses are defined as permitted leakage and capped in the agreement. Anything outside that is a breach triggering a price adjustment or damages claim. The locked-box mechanism is gaining traction in Malaysian mid-market transactions because it gives both sides price certainty and removes post-completion adjustment disputes. For SME transactions, it requires one additional step: the seller warrants that no unauthorised leakage has occurred since the locked-box date, and the buyer has access rights to verify this before completing. The seller in the logistics case eventually completed at a renegotiated price of RM 4,400,000. The RM 600,000 reduction was the cost of spending company money during the gap period without understanding what the agreement required. Have you ever advised on or been party to a Malaysian business sale where gap period spending created a dispute or a price adjustment? YES or NO in the comments. I read every reply. #MalaysianSME #CorporateLawMalaysia #MergersAndAcquisitions #DealStructuring #SMELegalProtection