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Team Zillow ringing the opening bell on Nasdaq

Shares of Zillow tumbled a bit this week — falling below $30 for the first time since its red-hot initial public offering on July 20th. Investors are closely watching the performance of the Seattle online real estate company, but so are company insiders (the employees, board members and executives) who hold stock and are subject to customary lock-up agreements.

Insiders at Zillow — like at most companies that conduct IPOs — are restricted from selling shares of the company for 180 days following the public offering. That’s pretty customary, and also the case at Pandora and LinkedIn which recently completed IPOs of their own.

But here’s where things get a little interesting with Zillow. The 180-day restriction could be reduced to just 90 days (on a portion of the individual’s stock) if Zillow’s share price stays above $25.

That could allow Zillow’s insiders to cash out a bit earlier, which could have a negative impact on the stock.

Patrick Schultheis, a partner at Wilson Sonsini Goodrich & Rosati in Seattle, said that Zillow’s lock-up agreement is “really unusual.” Of the 130 IPOs that he’s worked on over the years, the attorney could not recall an instance similar to Zillow’s.

“I’ve seen it asked for,” said Schultheis of the reduced lock-up period. However, he added, it is rarely implemented.

Schultheis noted that investment banking firms have different policies on these agreements, but most tend to go with the straightforward 180 day lock-up that venture capitalists and other investors are accustomed to.

William Carleton, an attorney at McNaul Ebel Nawrot & Helgren PLLC and a frequent guest contributor on GeekWire, called Zillow’s lock-up agreement “clever” and “unusual.”

It is “certainly not the standard boilerplate in employee and investor agreements,” he added.

Asked why Zillow would have requested a 90-day period, Schultheis noted that the company may simply be trying to cut a better deal for employees and early investors who had stuck with the company for a long period of time. Backers of Zillow include Benchmark Capital, Technology Crossover Ventures and Par Capital Management.

Spencer Rascoff

In an interview with GeekWire last month, Zillow CEO Spencer Rascoff stressed the importance of ignoring the daily fluctuations of the stock. “Over the long-term, what happens to the stock today is pretty much irrelevant,” Rascoff said. “If we delight our tens of millions of users, and thrill our thousands of advertisers, then, over the long-term, the stock price will take care of itself.”

The details of the lock-up agreement are spelled out in Zillow’s IPO filing, and the particulars are described below in the legalese common to S-1 filings. Shares of Zillow are now trading at $28 –up from the $20 offering price on July 20.

We, our officers and directors and substantially all of our shareholders have agreed that, subject to certain exceptions, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citi, dispose of or hedge any shares or any securities convertible into or exchangeable for shares of our capital stock. Citi in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

If, however, at any time beginning 90 days after the date of this prospectus, (i) we have filed with the SEC at least one quarterly report on Form 10-Q, (ii) the reported last sale price of our Class A common stock on The Nasdaq Global Market is at least 33% greater than the initial public offering price per share set forth on the cover page of this prospectus for 20 trading days out of any 30 trading day period ending after the 90th day following the date of this prospectus (which 30 trading day period may begin prior to such 90th day), and (iii) the reported last sale price of our Class A common stock on the last day of that 30 trading day period described in clause (ii) is at least 25% greater than the initial public offering price, then 25% of each holder’s capital stock that is subject to the 180-day restrictions described above as of immediately prior to the opening of The Nasdaq Global Market on the day following the end of the 30 trading day period, or the initial release date, will be automatically released from those restrictions on the initial release date, provided that none of the underwriters named under the section entitled “Underwriting” in this prospectus has published research on us within 15 days prior to the day following the initial release date. If an underwriter of this offering has published research on us within 15 days prior to the day following the initial release date, the initial release date will be deferred until the expiration of the 15-day period beginning on, and including, the date such research is published. Notwithstanding the foregoing, if (i) we issue an earnings release or material news or a material event relating to our company occurs during the last 17-day period of the 180-day restricted period or the last 17-day period prior to the initial release date, or (ii) prior to the initial release date or the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the initial release date or the last day of the 180-day restricted period, then, in either case, the initial release date will be deferred or the 180-day restricted period will be extended, as applicable, and the restrictions of the lock-up agreements will continue to apply, until the expiration of the 18-day period beginning on, and including, the issuance of the earnings release or material news or occurrence of the material event, unless Citi waives, in writing, such extension or deferral.

Editor’s note: Wilson Sonsini Goodrich & Rosati provides legal counsel to GeekWire. More on our partners here.

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