Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Put Options to Hedge Their IPO Windfall
Transcript
- Lucas: So we're seeing more founders quietly buying put options on their own stock ahead of an exit. It's a way to hedge the downside without selling a single share before the lockup expires. Luna: That sounds counterintuitive. Founders usually want to signal confidence, not hedge against their own company. Lucas: Right, and that's exactly why this stays under the radar. But look at NVIDIA down four and a half percent this week, or Coinbase up nearly twenty four percent. Volatility is real, and founders sitting on concentrated positions are paying attention. Luna: So how does a put actually work for a founder who's still locked up? Lucas: You buy a put that gives you the right to sell your shares at a set price, the strike, within a certain window. If the stock drops below that, you're protected. If it goes up, you just let the put expire and you keep the upside, minus the premium you paid. Luna: But the premium can be pricey. Especially for a volatile stock. Lucas: That's the tradeoff. On a stock like Coinbase, a three month put might cost you two to three percent of the notional value. For a founder with a hundred million dollars in stock, that's a couple million bucks. But if the stock crashes, that's cheap insurance. Luna: Is this something that's actually common, or are we talking about a few sophisticated founders? Lucas: It's still rare, but it's growing. I talked to a founder last month who did this ahead of an earnings report. He bought puts with a strike about fifteen percent below the offering price, expiring a week after earnings. Cost him about one point eight percent of his position. Luna: And what happened? Lucas: The stock dropped twelve percent on a weak guidance. His puts paid off nearly ten to one. He didn't sell any shares, but he effectively locked in his exit value. When the lockup expired, he sold the stock at the market price and the put gains offset the loss. Luna: So he didn't have to sell early and miss a rebound. That's clever. Lucas: Exactly. And it's different from a collar, where you also sell a call to fund the put. A collar caps your upside, but it's often cheaper. Some founders prefer that because it signals less doubt. Luna: But aren't there regulatory issues? I mean, buying puts on your own stock could look like insider trading if you time it around material news. Lucas: That's the key. You have to do it during a window when you don't have material nonpublic information. Usually that's after earnings, or in a pre-planned 10b5-1 plan. The SEC has been clear that hedging is allowed, but timing matters. Luna: So it's not about predicting bad news. It's about protecting against normal volatility. Lucas: Right. And for founders in sectors like biotech or crypto, where swings are huge, a put can be a rational risk management tool. ARK Genomics is up twelve percent this week. That kind of volatility goes both ways. Luna: I can see why it's not more common. It feels like you're betting against yourself. Lucas: But that's a psychological block, not a financial one. If you have a billion dollars in one stock, the downside is asymmetric. A put is just insurance. You don't fire your insurance agent for expecting rain. Luna: That's a good analogy. So what should a founder consider before doing this? Lucas: First, think about the strike. Too far out and it's expensive. Too close and it's useless. A ten to fifteen percent buffer is a common sweet spot. Second, think about the expiration. You want it to cover the lockup expiry or a major catalyst. Luna: What about the cost? How do you decide if it's worth it? Lucas: You compare the premium to the potential loss. If your stock drops twenty percent and you're not hedged, that's a real hit to your net worth. A two percent premium starts to look cheap. Some founders also use puts to avoid selling early and paying capital gains tax. Luna: That's a good point. Selling early could trigger taxes, but a put defers that. Lucas: Exactly. And it also avoids the signal of selling, which could spook the market. If a founder sells even a small stake, it's news. But buying puts is quiet. No one has to know. Luna: Is there a downside beyond the cost? Like, what if the stock goes up a lot? Lucas: You lose the premium, but you still participate in the upside. So you're only out the insurance cost. But there's also the risk of looking like you lack conviction. Some investors might see it as a red flag if they find out. Luna: Do we have any data on how often founders actually do this? Lucas: It's hard to track because it's not disclosed in the same way as a sale. But there's been a noticeable uptick in options activity around IPO lockups. I've seen estimates that maybe five to ten percent of founders hedge in some form, up from almost none a decade ago. Luna: And it's not just tech. Any founder with a concentrated position could use it. Lucas: Right. A founder in a consumer company or industrial could benefit just as much. The mechanics are the same. The principles of risk management don't care about your industry. Luna: So, Lucas, if a founder is listening and thinking about this, what's the first step they should take? Lucas: Talk to a good options attorney and a tax advisor. Make sure you understand the tax implications and the SEC rules. Then talk to your broker about the cost. It's not something you should do alone. Luna: And it feels like this is one of those things that's smart but rarely discussed. Lucas: That's the show, right? We dig into the strategies that founders use but don't talk about on stage. And honestly, if today's episode helped you think about your own exit, that's the kind of value we try to bring every week. Luna: Yeah, and if it did, maybe consider supporting the show. It's what keeps these conversations ad-free and accessible. Lucas: If today was worth a coffee to you, that's the link. Buy me a coffee dot com slash fexingo. Luna: Every little bit helps, and we appreciate the thought. Lucas: So back to the strategy. One thing I want to stress is that puts aren't just for the ultra-wealthy. Even a founder with a ten million dollar stake can use them. The cost scales. Luna: That's a good democratization angle. It's not just for billionaires. Lucas: Right. And as more founders use them, the stigma fades. We're seeing it become a standard part of the exit toolkit, like an earnout or a lockup agreement. Luna: What's the next evolution? Could we see founders using puts as part of a broader hedging program? Lucas: Possibly. Some are already using collars or even selling calls to generate income while they wait for the lockup to expire. It's all about managing risk and maximizing flexibility. Luna: So the key takeaway is that a put option is a smart, quiet way to protect your wealth without selling. Lucas: Exactly. It's about having the freedom to wait for the right moment to sell, without the fear of a market downturn wiping out your gains. And in a market like today's, that's worth thinking about.