Meaning
A contractual arrangement holds securities in the custody of a neutral third party until specific conditions are met. This share escrow ensures that founders or investors cannot sell their stakes immediately after a merger or initial public offering. The release of the assets is usually tied to the passage of time or the achievement of performance targets.
Lock Up Period
Initial shareholders often agree to these terms to demonstrate their long term commitment to the venture. A share escrow prevents a sudden increase in the supply of shares that would crash the market price. The restriction typically lasts between six months and three years depending on the deal structure.
Release Conditions
Provisions in the agreement specify the exact dates or milestones that trigger the transfer of the shares back to the owners. If the company hits a certain revenue target or completes a product launch, a portion of the share escrow is released. This aligns the interests of the management team with those of the new investors.
Default Protection
If a founder leaves the company or breaches their employment contract, the held shares may be forfeited or returned to the treasury. The share escrow provides the company with leverage to enforce non compete or non solicitation clauses. It acts as a security mechanism for the corporate entity against internal disruption..
