Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / Secondary Sales Give Founders Early Liquidity
Transcript
- Lucas: So Luna, we talk a lot about the big exit — the IPO, the acquisition, that champagne moment in the closing room. But there's a quieter way founders get liquidity long before any of that happens, and it's become a huge part of the private market. Luna: You're talking about secondary sales, right? Where founders sell some of their existing shares to outside investors without issuing new ones. Lucas: Exactly. And it's not just a niche tool anymore. Secondary volume in the first half of this year is up about twenty percent compared to the same period last year. Founders are using it to de-risk their personal finances, diversify, and even pay off debt — all while keeping their operating role and most of their ownership. Lucas: And before we dive deeper, a quick note because it matters to us: this show is ad-free by design. We keep it that way because of listeners who support us. If you find these conversations useful for what you're building or running, and you want to keep them free of ads, the link is buy me a coffee dot com slash fexingo. No pressure, just appreciate the option. Luna: Yeah, it's the reason we can get into the weeds without a sponsor break. So back to secondaries — what's a typical setup look like in practice? Lucas: Take a fintech founder I was reading about recently. Her company was valued at three billion in the last round. Before that round closed, she worked with the board and new investors to sell fifteen percent of her personal stake — that's about forty-five million dollars in personal liquidity. She stayed CEO with the same voting control. The buyers were late-stage funds who wanted a piece of the upside without waiting for the next primary round. Luna: So the company doesn't get the cash — the founder does. That's the key difference from a primary raise. Lucas: Right. And that's why it's sometimes called a 'liquidity event' for the founder, not the company. The company's balance sheet doesn't change. But the cap table does — new investors come in, and existing ones might sell too. Some secondary deals include employee shares, which is a whole other angle. Luna: And you mentioned the board — what do they get out of approving this? It's not like they're obligated to let founders cash out early. Lucas: The board usually wants to retain a motivated founder. If a founder is sitting on paper wealth they can't touch, that can create tension — especially if they're being pulled toward a competing offer or just feeling burnt out. A secondary sale can be a retention tool. Plus, some institutional investors like the idea of having a 'marked' price for the stock, which helps them mark their own books. Luna: But doesn't it send a signal that the founder lacks conviction? Like, 'if you're selling, why should I buy?' Lucas: That's the classic pushback. But the market has matured. Today, a well-structured secondary with a lockup on the remaining stake can actually be read as confidence — the founder is locking in some downside protection while keeping the bulk of their upside. It's a hedge, not a vote of no confidence. Luna: Hedging with your own stock. Interesting. And what about taxes? When you sell a big chunk of private stock, the IRS is definitely in the room. Lucas: Taxes are a huge part of the planning. Most secondary sales are taxable capital gains, but the rate depends on whether you've held the shares for more than a year. Some founders use QSBS — qualified small business stock — to exempt a large chunk of the gain, but you need to plan that well before the sale. The bottom line: get a good tax advisor early, because the structure of the deal can make a seven-figure difference. Luna: And how does a secondary complicate the next funding round? If a new investor comes in later, do they have to deal with the existing secondary buyers? Lucas: Yes, but it's manageable. New investors will do their diligence on the cap table, and they may ask for the same rights — pro-rata, information rights, that kind of thing. Sometimes a secondary creates a 'shadow cap table' that can get messy if the company later goes public. That's why many deals now include a provision that converts secondary shares to the same class as common stock at IPO, which simplifies the process. Luna: So it's not just a simple sale — there's a whole architecture around it. Who are the main buyers in this market? Lucas: A few big names dominate. Tiger Global and Accel are known for doing large secondaries in late-stage companies. Also, there are dedicated secondary funds like Industry Ventures and Forge, which specialize in buying private shares. They're often willing to pay a slight discount to the last round's price, because they're taking on illiquidity risk themselves. Luna: A discount — so the founder isn't always getting the full ninety dollars a share that the last round implied. Lucas: Right. The valuation is a starting point, but the actual price depends on supply and demand. If the company is hot and there's a lot of interest, founders can get a premium. If it's a down round or the market is shaky, they might have to accept a lower price. That's why timing matters. Luna: You mentioned down rounds — and with the market volatility we've seen this month, are secondaries becoming a safer bet for founders who are nervous about the IPO window? Lucas: Absolutely. Look at the tech selloff we've had in the last week — Apple down over three percent, Alphabet down four, even though the broader market is mixed. For a private founder, that doesn't directly affect their company's valuation, but it does affect the IPO appetite. If you're not sure the public markets will be welcoming in a year, a secondary now can lock in some of that private-market value without the risk of waiting. Luna: And there's also the psychological angle. I've interviewed founders who've done secondaries and they said it changed how they negotiated — they felt less desperate, more willing to say no to a bad offer. Lucas: That's a great point. Having actual cash in the bank gives you leverage. You're not negotiating with the board or a potential acquirer from a position of 'I have nothing to fall back on.' It's the same reason public company executives diversify their stock — to avoid being over-concentrated in one asset. Luna: But let's be real — a secondary isn't for every founder. When does it make sense to avoid it? Lucas: If you're early-stage and your company is growing fast, selling now could be a mistake because your stock is likely to be worth much more later. Also, if you have a big lockup period after a secondary — some deals require you to hold the remaining shares for two to three years — that can limit your flexibility. And in some cases, the board might require you to keep a certain ownership percentage to stay 'aligned' with investors. Luna: So it's a tool, not a gold rush. You have to weigh your personal need for cash against the growth trajectory of the company. Lucas: Exactly. And that's why the best founders treat secondaries as part of a broader financial plan, not an impulse decision. They talk to their lawyers, their wealth managers, and often a financial advisor who specializes in startup equity. Luna: And what about the employees? If the founder is selling, employees may wonder, 'should I be selling my options too?' Lucas: That's a real dynamic. Some companies allow employees to participate in the same secondary round — they can sell a portion of their vested options. That's a huge morale boost, and it can retain talent. But it also adds complexity, because you're dealing with many small sellers, each needing their own legal review. That's why many secondaries are limited to the founder and maybe a few early investors. Luna: Got it. So the takeaway for today: secondaries are a legitimate, structured way to get early liquidity without losing control, but they come with trade-offs and need careful planning. Lucas: And as the private market keeps growing — more capital, more funds, more tools — secondaries are only going to become more common. For a founder, it's worth understanding the mechanics early, even if you don't plan to use them for years. Luna: It's one more lever in the exit playbook. Thanks for breaking it down, Lucas. Lucas: Anytime. And if you're curious about how this plays out in a real deal, we'll dig into a specific case next week. Until then, keep building.