Practically, it's really less an incentive than a requirement imposed by the shadow of the future/hypothetical IPO and its future/hypothetical underwriter's strong preference (read: requirement) - even at incorporation when founder's purchase stock (perhaps 10 years before the IPO) they are required to agree to a lock-up for the same reasons as a stockholder who purchases stock one-year before an IPO in a growth-round.
In practice, almost all vc-backed companies with decent attorneys will ALWAYS require a lock-up provision in almost every security issuance documents including: 1. founder stock purchase agreements 2. employee stock option agreements and 3. VC preferred stock purchase agreements.
This shows how much influence the underwriter's ultimately have over the entire IPO process, even 10 years prior and with basically less than 1% chance of actually occurring haha.
The reason for the underwriter's ridiculously strong preference (really requirement) is that if insiders of a company (aka. people who work at the company and therefore (supposedly) have inside knowledge that the market does not have) sell 1% of a company quickly after an IPO, it can introduce a significant amount of volatility to the stock price because the market (almost) always reads an insider's sale of stock as a negative signal - this is why there's always buzz about potential price drops before a lock-up (though at this point it's often priced in well before hand).
As a follow-up: here's sample language from a founder stock purchase agreement (from orrick's start-up forms - https://www.orrick.com/Events-and-Publications/Documents/197...), where you can see it literally references IPO, underwriter's, securities laws, etc.
Lock-Up Agreement. If so requested by the Company or the
underwriters in connection with the initial public offering of the Company’s securities registered
under the Securities Act of 1933, as amended, Purchaser shall not sell, make any short sale of,
loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company
however or whenever acquired (except for those being registered) without the prior written
consent of the Company or such underwriters, as the case may be, for 180 days from the
effective date of the registration statement, plus such additional period, to the extent required by
FINRA rules, up to a maximum of 216 days from the effective date of the registration statement,
and Purchaser shall execute an agreement reflecting the foregoing as may be requested by the
underwriters at the time of such offering.
In practice, almost all vc-backed companies with decent attorneys will ALWAYS require a lock-up provision in almost every security issuance documents including: 1. founder stock purchase agreements 2. employee stock option agreements and 3. VC preferred stock purchase agreements.
This shows how much influence the underwriter's ultimately have over the entire IPO process, even 10 years prior and with basically less than 1% chance of actually occurring haha.
The reason for the underwriter's ridiculously strong preference (really requirement) is that if insiders of a company (aka. people who work at the company and therefore (supposedly) have inside knowledge that the market does not have) sell 1% of a company quickly after an IPO, it can introduce a significant amount of volatility to the stock price because the market (almost) always reads an insider's sale of stock as a negative signal - this is why there's always buzz about potential price drops before a lock-up (though at this point it's often priced in well before hand).