Why Figma Stock Crashed 81%: The IPO Mechanics Retail Never Saw Coming

The long IPO winter is finally coming to an end. And today, it’s a new wave of AI startups leading the surge in public listings.Right now, companies like OpenAI (headquartered within Microsoft for now) and Anthropic are inching closer to public offerings that could break the IPO market wide open over the next year.And that’s setting off a massive opportunity for early investors to gain an early stake in the next Google, Meta, or Microsoft.No doubt, this is a major wake-up call for investors. And it stands in stark contrast to the quiet trajectory tech IPOs have traced over the last five years.Since 2021, tech startups have broadly delayed going public. The reasoning is two-fold.For one, the Federal Reserve’s agenda of Quantitative Tightening (QT) – enacted just before the pandemic struck – marked a shift toward outright balance-sheet contraction that tightened liquidity in the broader market.That period between 2019 and October 2025 (when QT effectively ended) marked a balance-sheet runoff that removed roughly $60–$90 billion per month in liquidity.Whenever liquidity dries up, investors develop an aversion to risk. And tech stocks (especially at IPO) are commonly seen as some of the riskiest ventures out there.Add to that yet another crypto boom-and-bust cycle during the same time period – plus the “memeing” of every speculative tech trend from metaverses tothe blockchain – and one thing becomes clear about that era in hindsight…The IPO markets had fallen into what I like to call a “hype hole.” There were simply too many next-big-thing startups vying for attention and investor dollars. But almost none of these companies had solid fundamentals to back up all that hype.Back in 2021, would-be darlings like cloud provider Snowflake (SNOW) were getting near-daily coverage in the financial press leading up to their IPOs.I remember being incredulous when I actually looked at SNOW’s fundamentals.It didn’t have a solid product-market fit or any real semblance of a sustainable model.The stock was hitting the public market at an extremely inflated valuation – and it was competing for scraps against legacy giants like Cisco (CSCO) and Microsoft (MSFT).The markets were lousy with IPOs like SNOW back then. And I truly believe these overhyped slush stocks killed the last IPO boom dead in its tracks.But that dynamic is shifting as I write to you…The Private Players Gearing Up for the Next IPO BoomThe last few years have been very quiet for tech IPOs. The reason is simple.Many companies chose to grow privately on billions in venture funding – all while avoiding the scrutiny and pressure of the stock market.But the stakes, cost and speed of the artificial intelligence race have changed that cautious stance across the entire industry.The top AI players need far more compute capacity today than they did even a few years ago. They’re all looking to scale ever-larger AI models – right as billions of dollars in data centers and cloud infrastructure are rapidly built out.The dynamic here is undeniable. Private investors can only supply so much capital for so long. Long-term growth increasingly depends on tapping public markets that want a piece of the action.And trust me, investors want in as early and often as they can.As of early 2026, the total market capitalization of the AI industry is highly concentrated among top-tier technology firms. The combined value of major AI-focused companies currently exceeds $1.2 trillion. That number will only grow – especially as more AI players make their public debuts.So the modern AI race will mint many winners. And we know most of them will be the usual suspects like Microsoft, Google, and Apple leveraging their entrenched positions in this space.But those legacy giants won’t be the biggest drivers of profits for early investors.Instead, it’s the next wave of exciting AI startups I’m watching as this renewed IPO boom takes shape.And one of the earliest entrants in the race has been tipping off my Unusual Options Activity (UOA) Scanner for months now – Figma (FIG).After one of the splashiest public debuts in years, Figma is carrying much of the AI hype cycle on its shoulders.And it’s also pulling back the veil on one of the IPO market’s “dirty little secrets”…Figma’s Public Debut Revealed This Hidden Market DynamicOn July 31, 2025, Figma Inc. priced its IPO at $33. Shares soared 250% to close at $115.50 the very same day.The debut was celebrated in the financial media. It was seen as clear evidence that the IPO market hadn’t totally withered up and died.Of course, FIG’s initial gains eventually crumbled against the reality of a volatile market. Six months later, the stock trades at $22. It’s now down 81% from its peak – and 33% below IPO price.That fall from peak to crushing low in mere months is not exactly strange for a freshly IPO’d stock.But the innerworkings of Figma’s market debut are worth highlighting here for one reason…They reveal a hidden dynamic in the broader market that most traders have no idea about.Think about it this way… Most retail traders would’ve lost their shirts had they purchased the stock right at the IPO.But it’s a very different story for institutional investors. They were allocated shares at $33 –then turned around and sold them at $85-$115, capturing 150-250% gains in a single day.And for informed employees with equity? They already exited at $80 in September.Major venture capital firms sold 5% at IPO ($280M) and voluntarily locked in the remaining 95% until August 2026.And top-level executives obviously got a great deal. They sold $35 million at $43-48 in November — all while retail investors who purchased shares in secondary trading at $85-$142 now hold positions at $22.Here’s how it all breaks down in a simple chart:DateEventPriceParticipantsInformation AdvantageJuly 31, 2025IPO$33VCs sold 5% ($280M total)Complete—board representationJuly 31, 2025First day close$115Institutional investors soldKnew allocation vs. market priceAugust 1, 2025Peak$143Limited selling–September 5, 2025Early lockup expires$80Employees understanding provisionLockup structure knowledgeNovember 14, 2025Q3 earnings lockup$43-48Executives sold $35MQ3 results, Q4 visibilityJanuary 27, 2026180-day standard$35Standard lockup holdersPublic information onlyFebruary 13, 2026Current$22––The data makes one thing very clear to me…For everyone but the most informed market watchers, it was a wash.True, none of these moves were below board for an IPO. Every element operated within securities law. There’s nothing illegal in how Figma conducted its IPO.Still, the situation raises a lot of questions about how the current IPO market rewards investors. Here are the questions I keep asking myself…Can current IPOs really serve retail traders? Or are they only designed for the most well-informed and well-capitalized participants to make a killing?In order to peel back that dynamic, we need to dive a little deeper into how Figma structured its IPO – and the insider moves that are having ripple effects on every potential tech stock roll-out from here.Figma’s Pricing Decision: Fundamentals and DemandFigma brought strong metrics to its IPO: $821 million in annual recurring revenue, 46% growth, 91% gross margins, and positive net income.On paper, Figma looked better than most tech companies eyeing an IPO right now. And the smart money understood that in a big way.Figma’s offering was 40 times oversubscribed well before the IPO date. That means for every share available, 40 institutional investors indicated interest.Despite this overwhelming demand signal, the company priced shares at just $33, raising $1.22 billion. Keep those figures in mind.Now, here’s the breakdown of that raise:$412 million in primary capital for the company$807 million in secondary proceeds for selling shareholdersThe offering size represented only 37 million shares — just 7-9% of total shares outstanding. That’s small compared to typical IPO floats of 10-15%.It was an unusual setup. But it obviously didn’t deter FOMO-hungry investors that Figma was clearly overpricing its shares. Just consider this…Had Figma priced shares at $90—still below the $115 closing price—the company could have raised approximately $5.5 billion instead of $1.2 billion. That difference represents $3 billion in unrealized primary capital.This capital remained unraised while institutional investors who received $33 allocations were able to make a killing.Venture capitalist Bill Gurley said it best on IPO day: “They REFUSE to match supply/demand. They brag about the mis-match—’40X oversubscribed.’ The outcome is expected & fully intentional.”That pricing mismatch is exactly where institutional traders live. It’s one of those dirty little secrets that underpins most IPOs and the institutional money behind them.This skewed dynamic is exactly what I highlight every day I go live with Masters in Trading. We’ve managed record-setting gains uncovering broad mispricings between stocks, sectors – and even entire economies.The opportunity emerging with AI stocks like Figma is still not on most retail traders’ radars.But here at Masters in Trading, I give you the tools and the insights to trade confidently on the same signals institutional traders leverage every day on stocks just like it.If you’re interested in learning how to take your options mastery to the next level, I’d highly encourage you to join The Masters in Trading Options Challenge.For seven days, we walk through the foundations of real options trading – just the way I learned them from 28+ years in the options market. You’ll learn exactly how I think, exactly how I build trades, and exactly how I manage both the winners and the losers.Most of all, you’ll gain the knowledge to spot the kind of hidden market cycles I’m highlighting right here – whether it’s IPO hype or government-sparked volatility in commodities.Now, let’s dive back into one of the weirdest parts of the whole Figma story…Figma’s “Weird” Share AllocationWe can understand how IPO pricing actually works by looking at how shares are allocated in the run-up to a public listing.IPO share allocation operates through underwriter discretion.Investment banks (in Figma’s case, Morgan Stanley and Goldman Sachs) distribute shares to institutional investors based on several factors – the historical relationship between institutions and the investment bank, capital commitments, and even participation in the roadshow process.Retail investors generally cannot access IPO allocations except through limited brokerage programs or indirectly via mutual funds.If you want to get in directly, you’re required to purchase shares in secondary market trading after the opening bell—at prices determined by the initial supply-demand imbalanceHow Private Secondary Markets Factor InPrivate secondary markets also serve an important function in IPO pricing.When employees and early investors trade shares privately in the months before a public offering, these transactions provide objective price signals. They reflect what sophisticated investors will pay in arm’s-length transactions.One great example of this dynamic at work is the enterprise security company Rubrik. The stock allowed structured, secondary trading before it ever accessed the public markets.Shares traded in the $30-34 range through private transactions. Rubrik priced its IPO at $32—closely aligned with the private market clearing price. As a result, the stock had a modest first-day gain with minimal volatility.Figma went in a very different direction.Figma initially conducted a tender offer in May 2024 at $23.19 per share. But this transaction occurred 14 months before IPO.And it ultimately provided limited to no guidance for the company’s July 2025 listing.According to analysis by Augment, a secondary market platform, Figma actually restricted secondary trading in the months leading up to its IPO. This eliminated recent transaction data that might have informed pricing.Without those transactions, the pricing process was primarily skewed toward institutional investors during the roadshow.Augment’s analysis concluded:“Without a robust secondary market, there were no real pre-IPO price signals. When companies suppress that information, they enter IPOs blind.”Secondary trading is just one part of the larger dynamic underpinning Figma’s IPO.The other essential factor to consider is how IPO lock-ups traditionally work – and how Figma leveraged its lockup period to benefit insiders.The Pre-IPO Lock Up ProblemTraditional IPO lockups are straightforward.Pre-IPO shareholders agree not to sell shares for 180 days following the offering. This prevents immediate selling pressure and demonstrates insider confidence.The standard structure treats all insiders uniformly. Everyone waits 180 days. And everyone becomes eligible on day 181.Figma’s lockup agreement included a less common feature: an “Early Release Condition.”This provision stipulated that if the stock price rose 25% above IPO price and maintained that level for five consecutive trading days, then 25% of locked shares would be released after just 36 days rather than 180.Figma’s provision activated immediately because that $33 pricing was sufficiently below market clearing price ($85+ on opening) to guarantee exceeding the 25% threshold.Here’s how all the math breaks down:IPO price: $3325% threshold: $41.25Actual opening price: $85First-day close: $115.50Now, let me make one thing very clear — this almost never happens.Performance-based early lockup provisions appear in numerous IPO documents. We can think of them as theoretical incentives for employees.However, actually triggering one of these provisions is exceptionally rare. And the reason is straightforward.When IPOs are priced to reflect market demand, stocks typically trade near their offering price with modest gains of 10-20% – well below the 25-50% thresholds typically specified in these clauses.In 28 years of actively trading and analyzing IPOs, I have not witnessed a performance-based early lockup provision actually close – until Figma.The complete lockup architecture created multiple release dates. A staggered release schedule that, as you’ll see below, mostly benefitted institutional players and other insiders:September 5, 2025 (Day 36): Performance-based early release of 25% of locked sharesNovember 14, 2025 (Day 107): Additional release tied to Q3 earnings announcementJanuary 27, 2026 (Day 180): Standard 180-day lockup expirationThis structure provided insiders with three distinct selling windows—days 36, 107, and 180.So how did all those individual transactions play out?The Insider Transaction Timeline: August to NovemberOn August 4, 2025 — four days following the IPO — CEO Dylan Field filed a Rule 10b5-1 trading plan with the Securities and Exchange Commission (SEC).This plan allows executives to sell shares on predetermined schedules, providing safe harbor from insider trading liability.Field’s plan authorized the sale of up to 3.06 million shares beginning November 24, 2025. Execution was conditional on the stock reaching certain undisclosed price thresholds.When the performance-based lockup expired on September 5, the stock traded around $80—down 44% from its $143 peak but still 142% above the IPO price.Shareholders who understood the lockup provisions and chose to sell at this juncture captured $80 per share. As we know, the stock would subsequently decline an additional 72% to $22 over the following five months.In November, Figma’s executives would get another profitable window in which to sell their shares.And just like we’d expect, SEC Form 4 filings document significant executive selling in November 2025 when the stock traded in the $43-48 range.Here’s how all the executive sales break down:Shaunt Voskanian (Chief Revenue Officer):November 3: 26,741 shares at $48.17 = $1.3 millionNovember 10: 403,335 shares at $43.39 = $17.5 millionTotal: $18.8 millionKris Rasmussen (Chief Technology Officer):November 10-12: 304,500 shares at $43.63 = $13.3 millionPraveer Melwani (Chief Financial Officer):November 10: 80,934 shares at $43.47 = $3.5 millionAdditional executive sales: Approximately $8 millionTotal November executive selling: ~$35 million at prices of $43-48It’s important to note those November sales happened around a particularly catalyst-rich time for the stock.Executives had a Q3 2025 earnings release (released November 12) showing revenue growth deceleration from 41% to 33% year-over-year.It also provided internal visibility into the company’s Q4 2025 product pipeline and customer trends. And to top it all off, it clued execs into Morgan Stanley’s lowered price target projection for January 2026.Yes, gaps between internal knowledge and public disclosure are inherent in public markets. But this gap was engineered. Intentional.And insiders are looking to leverage that knowledge gap for yet another pay day on Figma stock as I write to you.The August 2026 CatalystThe final lockup expiration occurs on August 31st. That’s when venture capital firms holding over 50% of shares become eligible to sell. That total float represents approximately $7 billion in shares at current prices.Now, let me remind you once again… This is all strictly above board. Lock-up windows like these are at the core of every IPO.And there’s nothing inherently wrong with the structure of Figma’s IPO.Figma’s IPO structure combined four components that individually appear within normal parameters – secondary trading, consistent lock-up periods, a roadshow process, and a share allocation methodology that privileged those with a stake in the business.But collectively, they benefited only insiders in the period following the IPO.Don’t get me wrong. I actually like Figma stock. Figma continues operating with solid underlying metrics. It’s showing strong, 38% year-over-year revenue growth. Plus, it’s cheap compared to its IPO price.But I’m not recommending anyone buy FIG today.I’m highlighting FIG because it’s a sign of what’s to come from the next wave of tech IPOs.It’s the perfect case study showing how pricing strategy, lockup architecture, and information flow intersect in modern public offerings to keep retail traders from getting in position before the smart money.I asked earlier whether or not modern IPOs could serve everyone from retail traders to the C-Suite.Figma’s story would appear to slap a big NO on that one. But I’m a bit more optimistic.Here at Masters in Trading, my mission is to give you the tools to level the playing field.I hop on Masters in Trading LIVE every day at 11AM EST to show you how to spot the underlying dynamics – the institutional signals, the massive price dislocations – that actually move the stock market. No headlines or hype. Just the fundamentals.If you’ve read this far, why not take the next step in accelerating your mastery of the options market?Once again, I’d like to point you to The Masters in Trading Options Challenge.The Challenge is where we take everything you learn in my daily LIVEs — fixed risk, thesis-driven exits, laddered entries, defined-duration trades, and emotional discipline — and put it into practice in a structured, step-by-step environment.Just click here to check out what the Masters in Trading Options Challenge has in store for you.Remember, the creative trader wins.More from InvestorPlaceThe Great Tech Dislocation – and What Happens NextThis Breakthrough Changed Everything – and Most Investors Missed ItMarkets Change. Most Investors Don’t. That’s the Problem.