Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / Why Founders Use Structured Liquidity Tiers for Exit Flexibility
Transcript
- Lucas: So we keep hearing about founders taking chips off the table before an exit — secondary sales, pre ipo loans, tender offers. But there's a strategy that's getting more sophisticated, and it's one where you don't just sell a chunk and walk away. It's called structured liquidity tiers. Luna: Structured liquidity tiers — sounds like something that belongs in a term sheet, not a cocktail party conversation. What does it actually mean in practice? Lucas: In practice, it means the founder designs the exit so that they get liquidity in tranches — triggered by specific events or valuations. Instead of one big liquidity event where you sell all your shares at once, you set up a schedule for partial sales, earnouts, or stock swaps that unlock over time. Luna: So it's like having an exit that's a process, not a single day. Why would a founder want that when they could just sell everything on IPO day? Lucas: Because IPO day can be a crapshoot. Look at the current market — Apple's at $283.78, NVIDIA's at $192.53. Those are healthy numbers, but we've seen volatility. If you sell everything on day one and the stock pops another 20% in the next month, you left a ton of money on the table. Conversely, if the stock tanks, you're stuck. Tiers let you hedge. Luna: Right, so it's a way to not bet the whole farm on one closing price. But how do you actually structure a liquidity tier? I'm picturing a waterfall of conditions. Lucas: Exactly. A typical tier might look like this: at the IPO, you sell 20% of your shares. Then if the stock trades above $200 for 30 consecutive days, you sell another 20%. If the company hits a certain revenue milestone in the next two quarters, you get an earnout on another tranche. And if the stock drops below a certain floor, you might have a guaranteed minimum from a backstop investor. Luna: That's a lot of moving parts. Who's on the other side of those trades? I mean, if the stock goes down, who's providing that backstop? Lucas: Institutional investors, often. Hedge funds, private equity firms, sometimes the underwriters themselves. They'll offer a structure like a collar — you cap your upside above a certain level in exchange for downside protection. Or they'll buy call options on your shares. It's basically financial engineering for founder shares. Luna: And this is becoming standard? I feel like five years ago, founders just sold on IPO day or held forever. Lucas: It's becoming much more common. Take the Anthropic Mythos release this week — that company has a complex capital structure with multiple investors who have different liquidation preferences. Founders there are likely using tiers to ensure they don't get diluted out of their upside. And the FTC just gave Elon Musk the OK to acquire Mesh, the SpaceX alumni startup. In that deal, you can bet there are earnouts tied to retention and performance metrics. Luna: So with Mesh, the founders didn't just get a check and walk away. They have to stay and hit milestones to unlock more value. That's a different kind of exit — almost like a hybrid between an acquisition and a long-term incentive plan. Lucas: Exactly. And that structure protects the acquirer, too. They don't want to pay full price upfront for a team that might leave. So the earnout acts as a retention tool. But for the founder, the tier gives them a chance to prove the company's value post-acquisition and earn more if they deliver. Luna: What about the tax implications? If you spread your sale over multiple years, that could push you into a lower capital gains bracket each year, right? Lucas: That's a big part of it. If you sell everything in one tax year, you might hit the top long-term capital gains rate — currently 20% plus the 3.8% net investment income tax, and potentially state taxes. By spreading sales across tax years, you can stay in lower brackets. Some founders use structured tiers specifically for tax planning. Luna: So it's not just about market timing — it's about tax efficiency. That makes sense. But I have to ask: doesn't this create complexity? More lawyers, more bankers, more fees? Lucas: Absolutely. It's not cheap. You're paying for structuring, for legal opinions, for the counterparties to take the other side. But for founders with large positions — think tens or hundreds of millions — the cost is a fraction of the value they protect. Plus, the rise of secondary markets has made these structures more standardized and cheaper to execute. Luna: Are there any risks? I mean, what if the trigger conditions never happen? You could be stuck holding shares you wanted to sell. Lucas: That's the biggest risk. If you set the tier trigger too high — say, the stock needs to hit $300 and it never does — you might end up holding a larger position than you wanted. That's why founders work with advisors to set realistic triggers. They often include a 'time-based' fallback: if the condition isn't met by a certain date, you can sell a portion anyway. Luna: So it's a balance between ambition and pragmatism. What about anti-dilution? If the company issues more shares after the IPO, your tiered stake could get diluted. Lucas: That's where anti-dilution clauses come in. In a well-structured tier, the founder negotiates that if the company does a secondary offering or issues equity for an acquisition, their future tranches are adjusted — either by increasing the number of shares or by lowering the trigger price. It's a common provision in these agreements. Luna: Interesting. So it's not just 'sell X shares if price hits Y.' It's a whole bespoke contract. I imagine the negotiation is intense. Lucas: Very intense. But it's becoming a standard part of the toolkit. I've seen pitches from investment banks that now offer 'liquidity tier templates' for founders — almost like a menu. You pick your preferred triggers: price-based, time-based, performance-based, or a combination. Then they run the numbers on what each scenario yields. Luna: And these templates are being used for IPOs and acquisitions? Or more one than the other? Lucas: Both, but increasingly for acquisitions. Look at the recent SPAC deals — many included earnouts that are essentially liquidity tiers. The founder gets a base payment at closing, plus additional shares if the stock trades above certain levels. It's the same concept, just wrapped in SPAC terminology. Luna: Let's talk numbers. Can you give me a concrete example of how a founder might structure a tier for a company valued around, say, $1 billion? Lucas: Sure. Let's say a founder owns 20% of a company that's going public at a $1 billion valuation. That's $200 million in paper wealth. They might structure three tiers: Tier one, sell 5% of their stake at IPO — that's $10 million. Tier two: if the stock price increases by 25% within six months, sell another 5% — that's $12.5 million. Tier three: if the company hits $150 million in revenue in the next fiscal year, sell the remaining 10% — that could be $20 million or more if the market rewards growth. Luna: So they get $10 million guaranteed at IPO, then potentially $32.5 million more if things go well. That's a nice safety net while still having upside. Lucas: Exactly. And if the stock tanks, they only sold 5% — they're not forced to sell at the bottom. They can wait for the next trigger or renegotiate. Luna: What about the board and investors? Do they push back on these structures? I imagine they'd prefer the founder to be fully aligned — not selling too early. Lucas: That's a real tension. Some VCs want founders to hold their shares through the IPO and beyond, to signal confidence. But more sophisticated VCs recognize that a founder who's financially secure makes better long-term decisions. So they're okay with structured liquidity, as long as it's transparent and the founder retains meaningful ownership. Luna: Meaningful ownership — what's that threshold? Like, how much should a founder keep? Lucas: There's no hard rule, but many advisors suggest retaining at least 50% of your pre ipo stake through the first year, and no less than 10-20% of the company if you're still the CEO. It's about alignment with shareholders. Luna: So tiers let you sell some but keep enough to stay motivated. That makes sense. And I guess it also protects against the 'founder selling out' narrative that can hurt the stock. Lucas: Exactly. If you announce a structured tier plan in the IPO prospectus, it's seen as disciplined financial planning, not a lack of confidence. Compare that to a founder who sells a huge block six months after IPO — that can spook the market. Luna: Speaking of market perception, how do you think the current environment — with interest rates where they are and the S&P near highs — affects the popularity of these tiers? Lucas: In a high-volatility market like we've seen, tiers are more attractive. The ARKK ETF is at $78.13 — it's been a wild ride. Founders in growth sectors know that valuations can swing 30% in a month. They want insurance. Tiers provide that. Luna: And on the acquirer side, with the FTC approving big deals like Mesh, earnouts are a way to get regulatory approval — you're not paying the full price upfront, so it looks less like a monopolistic cash grab. Lucas: That's a great point. Regulators are looking at earnouts as a sign that the deal is based on future performance, not just market power. So structured tiers can be a strategic tool for getting deals through. Luna: Lucas, I want to ask something that might sound basic, but if I'm a founder listening to this, what's the first step to setting up a liquidity tier? Do I call my lawyer? My banker? Lucas: I'd start with your CFO or your lead independent director — someone who understands both your personal financial goals and the company's trajectory. They can help you model different scenarios. Then you bring in an investment bank that specializes in founder liquidity. A good one will run a sensitivity analysis showing you the outcomes under various stock price paths. Then you negotiate the terms with your board and the underwriters. Luna: And how long does that process take? Is this something you do six months before IPO, or a year? Lucas: Ideally, you start thinking about it at least a year before the IPO. The actual structuring often happens three to six months before filing. It's not something you can rush — the legal documents need to be drafted, the counterparties need to be lined up, and the SEC will want to review any material agreements. Luna: So it's a serious process. But for founders who do it right, it sounds like a win-win: they get liquidity, stay aligned, and can sleep at night knowing they're not all-in on one day's stock price. Lucas: Exactly. And that peace of mind is worth the complexity. I think we'll see even more innovation in this space — maybe tiers that adjust automatically based on market conditions, or that are tied to ESG metrics. Luna: esg linked liquidity tiers — that's a new one. I could see a founder saying, 'If we hit our carbon reduction target, I unlock another tranche.' It ties personal wealth to company mission. Lucas: Exactly. And that kind of structure could be really powerful for mission-driven companies. Anyway, if you're a founder and these conversations are useful for what you're building or running, we've got a listener-supported show — no ads, no sponsors. If you find value in what we do, you can support us at buy me a coffee dot com slash fexingo. It genuinely helps us keep going. Luna: Yeah, and it lets us stay independent and dive deep into these niche topics. So if you're getting something out of it, we appreciate it. Lucas: Back to tiers — one thing I didn't mention is the role of secondary marketplaces. Companies like Forge Global and EquityZen have made it easier for founders to set up pre ipo liquidity tiers even before the IPO. You can sell a portion of your shares to institutional investors through a structured auction. Luna: So the same concept applies pre ipo. That's a smart extension — you don't have to wait for the IPO to start de-risking. Lucas: Right. And that's what we're seeing more of. The founder who plans their liquidity in stages, starting years before the exit, is the one who ends up with the most control and the best outcomes. Luna: Control and flexibility — that's the takeaway. Not just 'exit,' but 'exit on your own terms.' Lucas: Exactly. And on that note, thanks for listening. We'll be back next time with another deep dive into the mechanics of startup exits.