Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Build Liquidity Into Their Capital Stack Before an Exit
Transcript
- Lucas: There's a quiet shift happening inside startup cap tables that most people outside the industry haven't noticed yet. Founders are building liquidity rights directly into their financing rounds — before any IPO or acquisition happens. Luna: You mean selling shares privately, while the company is still private? That's been around for a while, hasn't it? Lucas: Secondary sales have existed, sure. But what's new is how formalized and structured it's becoming. I'm talking about contractual provisions in the actual financing documents — tender offer rights, preemptive rights, liquidity pools that are triggered by specific valuation milestones or time horizons. Luna: So it's not just a founder calling up an investor and asking if they'll buy some shares. It's written into the legal fabric of the company. Lucas: Exactly. And it changes the conversation around when founders can take money off the table. Take Klarna — before their IPO chatter heated up, they ran a massive secondary tender in 2022 that let employees and early investors sell something like one point five billion dollars worth of shares. That wasn't an exit event, it was a planned liquidity event inside the cap table. Luna: And Stripe did something similar, right? They've been running regular tender offers for years, almost like clockwork. Lucas: Stripe is the textbook case. They've been doing annual or semi-annual tender offers since 2019, allowing current and former employees to sell shares. It's become part of their capital markets strategy. They don't need to IPO just to give people liquidity — they've built liquidity into their capital stack. Luna: But how do you price those shares? That's always the tricky part. You don't have a public market telling you what the stock is worth every second. Lucas: That's where the valuation machinery comes in. Typically, the company commissions a 409A valuation from an independent firm — that sets a fair market value for common stock. Then the tender price is usually a premium to that, sometimes tied to the most recent preferred round price or a blended average. It's not perfect, but it gives everyone a defensible number. Luna: And the market context matters too. You mentioned NVIDIA earlier — it's trading around $210 today, up massively over the past couple years. That kind of market sentiment trickles down. If public comps are hot, private secondary buyers are willing to pay more. Lucas: Right. When you see a stock like NVIDIA, trading at ticker symbol N-V-D-A, around $210, it lifts the entire tech private market. Investors compare the startup to public peers, and if the public peers are soaring, the private secondary price gets a boost. But it cuts both ways — if public tech gets hammered, those tender offers might get repriced lower. Luna: So who's buying these shares in the tender? Is it mostly existing investors, or are new funds coming in? Lucas: Both. Typically the company's existing venture investors have a right of first refusal — they can buy the shares before anyone else. But increasingly, you're seeing dedicated secondary funds like EquityZen, Forge Global, or Industry Ventures step in. They specialize in buying private company stock from employees and early investors. Some of these funds have raised billions just for this purpose. Luna: So the liquidity waterfall is becoming a feature, not a bug. Founders are negotiating these rights earlier, sometimes even at Series A. Lucas: That's the real shift. I've seen term sheets where the lead investor agrees to a 'liquidity pool' — a set amount, say 10 to 15 percent of the round proceeds that can be used to buy shares from existing holders. It's written into the Series A docs. The founder gets a path to partial liquidity without having to sell the company or go public. Luna: And that changes the psychology of building a company. If you know you can take some money off the table after four or five years, you might be more willing to stay private longer, build something durable. Lucas: Absolutely. And it aligns incentives. Employees get a tangible reward for their equity without waiting for an exit that might never come. Founders can de-risk their personal finances. The company retains talent. It's a win-win — provided the cap table can handle the complexity. Luna: But there's a tension, isn't there? If you're selling shares at a price that's below what you think the company will be worth at IPO, you're leaving money on the table. And if you sell too much, you signal doubt. Lucas: That's the delicate balance. Founders typically sell a small fraction — maybe 10 to 20 percent of their stake. Enough to buy a house, diversify, cover taxes. Not enough to lose control or send a negative signal. And they usually do it in stages, not all at once. Luna: I've seen some founders structure it as a 'pre ipo loan' against their shares instead of selling outright. That way they get cash without triggering a taxable event. Lucas: That's another layer. Loans against shares are becoming more common, especially from firms like Apollo or specialized lenders. But they come with risk — if the stock price drops, the lender may demand more collateral or call the loan. Luna: So the liquidity waterfall has multiple tiers: tender offers, loan facilities, secondary sales, and eventually the IPO or acquisition itself. It's a menu of options, not just one lever. Lucas: And the smart founders are building that menu early. They're not waiting until the week before an IPO to figure out how to get cash. They're negotiating these rights in their seed rounds and Series A, so when the time comes, the infrastructure is in place. Luna: It's a level of financial sophistication that didn't exist a decade ago. The playbook is getting written in real time. Lucas: It is. And it's one of those things where, if you're a founder listening, it's worth paying attention to. Because the window for these structures is still open, but it might not stay that way forever. Luna: Companies like SpaceX went public at $135 a share and that was a massive event — but that's an outlier. For most startups, the path to liquidity is going to look more like a staircase than a cliff. Lucas: And that staircase is built one step at a time, starting with the cap table. If these conversations are useful for what you're building or running, let me say this: we deliberately don't run ads on these episodes. It's a choice. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: It's a small gesture that keeps this show independent and focused on what matters. Appreciate everyone who chips in. Lucas: Alright, back to the mechanics. One of the trickiest parts of these internal liquidity events is the tax treatment. When an employee sells shares in a tender, it's a taxable event. They owe capital gains tax on the difference between the sale price and their basis. But the basis for early employees is often pennies per share, so the tax bill can be huge. Luna: That's where 83 elections come in. If you file an 83 within 30 days of receiving restricted stock, you pay tax on the value at grant, not at vesting. It can save a fortune if the company appreciates. Lucas: Right. But many founders and early employees don't know about it. I've seen cases where someone didn't file an 83, then sold shares in a tender at a $50 million valuation, and owed more in taxes than they had in cash. Luna: That's painful. And it underscores how important financial education is for startup employees. The equity is only valuable if you can actually keep the upside. Lucas: Exactly. So the liquidity waterfall is not just about the structure — it's about the knowledge to navigate it. Founders who educate their teams about these mechanisms build more resilient companies. Luna: And as the IPO market remains choppy — you look at the headlines today, every fusion startup that has raised over $100 million, the US government's Anthropic ban — the private markets are becoming more sophisticated. The liquidity waterfall is becoming standard. Lucas: I think in five years, we'll look back and wonder how startups ever operated without formal liquidity rights in their cap tables. It's one of those innovations that seems obvious in retrospect, but right now it's still a competitive advantage for the founders who know about it. Luna: And for the rest of us, it's a fascinating window into how the startup world is evolving. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. We'll be back with more.