Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Are Using IPO Margin Loans for Pre-Exit Cash
Transcript
- Lucas: So there's this tool that's been around for decades on Wall Street, but founders are only now starting to use it in a big way: borrowing against your own pre ipo shares. Luna: You mean like a margin loan, but on stock that's not even public yet? Lucas: Exactly. And it's not just for the ultra-wealthy anymore. With the explosion of unicorns staying private longer, banks and specialty lenders have built products specifically for founders who want cash before the IPO — without selling a single share. Luna: So how does that work practically? The shares are illiquid, there's no market price yet. Lucas: Right, so the lender has to estimate value. They look at the last 409A valuation, any secondary trades that have happened privately, and comparable public companies in the same sector. Then they apply a haircut — typically 30 to 50 percent — and lend against that. So if your shares are notionally worth ten million, you might get a line of credit for three to five million. Luna: And that's before the IPO even prices. The risk for the lender is huge if the IPO flops. Lucas: It is, which is why these loans usually come with a personal guarantee and a very specific trigger: if the stock trades below a certain level after the IPO, the lender can call the loan. You either put up more collateral or pay down the principal. It's basically a margin call, but tied to the IPO price. Luna: And we've seen some painful examples of that, right? Companies that priced high, then cratered. Lucas: Absolutely. Look at a company like Rivian — it's trading at $16.52 today, down over 90 percent from its post ipo peak. Any founder who took a margin loan expecting a smooth ride had a very rough awakening. But for companies with strong fundamentals and a clear IPO path, it can be a smart way to get liquidity without diluting your ownership. Luna: Why would a founder need cash before the IPO? Isn't the whole point of going public to get that liquidity event? Lucas: Great question. There are a few reasons. One is taxes — if you've exercised incentive stock options, you might owe alternative minimum tax before you can sell the shares. Another is lifestyle: maybe you want to buy a house, diversify, or fund a new venture. And sometimes you want to double down — use the loan to invest back into your own company in a secondary round. Luna: That last one is interesting. Borrow against your shares to buy more shares? That feels like leverage on leverage. Lucas: It is, and it's not for everyone. But for founders who are extremely bullish on their company's trajectory, it can be a way to increase their ownership without putting in new cash. The risk, of course, is that if the company stumbles, you're on the hook for the loan with shares that are worth less. Luna: Let's talk about the landscape right now. We're seeing Airbnb at $142.41, up almost 8 percent in the last five days. That kind of volatility matters for these loans, because the lender's valuation is partly based on public comps. Lucas: Exactly. If you're a private travel-tech company looking at Airbnb's stock climbing, it gives you more leverage in negotiating the loan to value ratio. But if comps are falling, lenders get stricter. We're also seeing a boom in secondary markets — platforms like Forge and EquityZen — which give lenders more data points to price these loans. Luna: And speaking of data points, there's that TechCrunch story about Founders Fund making an outlier bet on a company that humanely kills fish. That's a weird example, but it shows the kind of conviction some investors have — and that same conviction might lead a founder to take a margin loan instead of selling. Lucas: Right, because if you truly believe in your mission, you'd rather borrow than give up equity. The loan is a temporary bridge. Once the IPO happens and the lockup expires, you can sell a portion of your shares to pay off the loan. Luna: But what about the lockup itself? Most IPOs have a 180-day lockup where insiders can't sell. Doesn't that create a timing mismatch? Lucas: It does, and lenders account for it. They'll structure the loan so that repayment isn't due until after the lockup. Some even offer a provision where you can extend the loan if the stock is trading below a certain level. But that extension comes with higher interest rates — we're talking SOFR plus 400 to 600 basis points. Luna: So the cost of this liquidity is meaningful. It's not free money. Lucas: No, it's not. But for a founder who needs cash and doesn't want to trigger a signal by selling secondary shares pre ipo, it can be the best option. Selling even a small stake ahead of an IPO can spook investors — they think you're bailing. A loan is private, and it doesn't change your ownership percentage. Luna: That's a good point. Perception matters a lot in the IPO process. If the lead underwriter sees a founder taking a margin loan, do they even know? Lucas: Typically, no. The loan is a private arrangement between the founder and the lender. The underwriter doesn't need to know, as long as the loan doesn't violate any terms in the underwriting agreement. Most agreements just restrict selling shares, not borrowing against them. Luna: So it's a stealthy way to get liquidity. But it's not without its horror stories. I remember reading about a founder who took a margin loan right before the company's IPO got delayed — the entire business model came under regulatory scrutiny. The loan got called, he had to sell shares at a fire-sale price in the secondary market. Lucas: That's the nightmare scenario. And it's why I tell founders to have a Plan B. If the IPO gets pulled or priced significantly lower, can you cover the loan from other assets? Do you have a personal guarantee that could wipe out your savings? These are serious questions. Luna: So for every founder considering this, the due diligence has to be as rigorous as the company's own IPO prep. Lucas: Absolutely. And you need to shop around. Not all lenders offer the same terms. Some specialize in tech founders, others in biotech. The interest rates, loan to value ratios, and covenants can vary widely. Luna: What about the size of the loan? Is there a minimum threshold? Lucas: Typically, lenders want to see at least a couple million dollars in share value to make it worth their while. So this is really for founders who have a meaningful stake — usually co-founders or early employees with significant equity. Luna: So it's not for the rank and file employee with a few thousand options. Lucas: No, not yet. But as the ecosystem matures, we might see smaller loans or pooled vehicles. For now, it's a tool for the top of the cap table. Luna: Let's take a quick step back. If these conversations are useful for what you're building or running, the show is ad-free and listener-supported. If today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, and it genuinely makes a difference. We keep the show independent that way. Back to the topic — one thing I want to highlight is that the SEC has been paying more attention to these loans. Rule 144 still applies, and there's a risk that a loan could be construed as a constructive sale if the terms are too aggressive. Luna: Constructive sale — that's when you effectively lock in the economics of a sale without actually selling, right? The IRS could treat the loan as a taxable event. Lucas: Exactly. If the loan is non-recourse — meaning the lender can only go after the shares, not your other assets — the IRS might argue you've effectively sold the shares. That's a landmine. So founders need a tax advisor who understands Section 1259 of the Internal Revenue Code. Luna: So it's not just about finding a lender; it's about structuring the loan properly with legal and tax counsel. Lucas: Right. And that's where the cost adds up. Legal fees, tax advice, maybe a financial advisor. But for a multi-million dollar loan, those costs are a rounding error. Luna: We've seen a few high-profile examples recently. I know of a founder at a late-stage AI company who used a margin loan to fund an escrow account for a 10b5-1 trading plan. That way, he could start selling on a schedule right after the lockup without worrying about insider trading rules. Lucas: That's a clever use case. The loan gives him cash to meet his obligations while the trading plan locks in the sales. It's like a bridge between two different liquidity strategies. Luna: And with AI companies staying private longer — we've seen that with OpenAI, Anthropic, and others — these loans become almost necessary for early employees who've been waiting a decade for an exit. Lucas: That's the key trend: the longer companies stay private, the more demand there is for pre ipo liquidity tools. Tender offers, secondary sales, and now margin loans. They're all part of a growing toolkit. Luna: So looking ahead, do you think margin loans will become as common as secondary sales? Lucas: I think they'll complement each other. Secondary sales are great for getting cash without debt, but they dilute your ownership and can signal a lack of confidence. Margin loans are debt, so you keep the upside, but you take on risk. The smartest founders will use a mix — sell a small amount to cover taxes, borrow against the rest to fund lifestyle, and hold the bulk for the IPO pop. Luna: That's a nuanced strategy. It requires a lot of planning and a high tolerance for complexity. Lucas: It does. But for founders who are building billion-dollar companies, complexity is part of the job. The question is whether the added risk is worth the liquidity. And for many, the answer is yes — especially when you see how much volatility can work in your favor if you time it right. Luna: Given that, what's your advice for a founder listening today who's considering this path? Lucas: Start early. Talk to three or four lenders before you need the money. Understand the terms, the triggers, and the tax implications. And have a worst-case scenario plan. If you can't sleep at night thinking about a margin call, then this isn't for you. But if you can stomach the risk, it's one of the most powerful tools available for staying in control of your equity while unlocking its value.