Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Stock Lending to Monetize Locked-Up Shares
Transcript
- Lucas: Look, we talk a lot on this show about selling — IPOs, secondary sales, tender offers. But there's one quiet, almost boring financial tool that founders rarely talk about, and it can turn a locked-up position into a steady stream of income: stock lending. Luna: Stock lending — you mean like when your broker lends your shares to a short seller, and you get paid a fee? Lucas: Exactly. For an ordinary investor, it's the kind of thing your brokerage does in the background to squeeze a few basis points out of your holdings. But for a founder sitting on a massive, locked-up position right after an IPO, it can be a genuinely meaningful income source while you're waiting for the lockup to expire. Luna: Is that actually legal for insiders? I thought founders were restricted from doing much of anything with their shares before the lockup ends. Lucas: It's legal, but it's tightly regulated — and the rules depend on whether you're in a public company or still pre ipo. Generally, once you're public and past the quiet period, you can lend shares, but you've got to disclose it. The SEC looks closely at material non-public information, so you can't lend shares if you're in possession of something that could move the stock. Luna: So it's not something you'd do right before earnings. But after an IPO, when you're locked up for six months, that window seems ideal. Lucas: Right. And we're seeing some interesting dynamics right now in the market that make this especially relevant. Take NVIDIA, for example — it's down about five percent over the last five days. When a stock drops like that, short interest often climbs. And when short interest is high, the demand to borrow shares goes up, which means the fees you can earn go up too. Luna: And that's where a founder with a large position can step in and lend those shares at a premium, right? Lucas: Exactly. The fee — we call it the borrow rate — can range from a few basis points to triple digits annually for super hard to borrow names. If you're a founder with, say, five million shares locked up, and the borrow rate is five percent, that's real money flowing in every month while you wait. Luna: Have you seen any founders actually doing this? I feel like it's not a common move. Lucas: It's rare, but it happens. There's a famous example from a few years ago with a tech founder who lent out a chunk of his post ipo stock during the lockup. He reportedly earned enough in lending fees to cover his tax bill on the eventual sale. That's the sort of outcome that gets people's attention. Luna: But isn't there a risk? If you lend your shares and the stock suddenly drops, you might not be able to sell even if you wanted to. Lucas: That's the key risk — recall risk. When you lend shares, you have the right to recall them, but it's not instantaneous. It can take a day or two, and if the stock is volatile, that delay can cost you. And there's also the risk that the borrower defaults, though that's mitigated by collateral — typically cash or Treasuries. Luna: So it's not a free lunch. You're trading some liquidity for income. Lucas: Exactly. But for a founder who is absolutely not going to sell before the lockup expires — maybe they believe in the long-term story — lending can be a way to monetize a position that would otherwise just sit there. And it's a way to put pressure on the stock, because every share lent is a share that could be sold short. Luna: And that's the controversial part — founders helping short sellers. How do you reconcile that? Lucas: It's a philosophical question. On one hand, you're enabling bearish bets on your own company. On the other, you're earning a fee for providing a service to the market. And in practice, short sellers play a vital role in price discovery. If your company is solid, the short interest will eventually dissipate, and you've pocketed some income along the way. Luna: Would you advise a founder to do this? Maybe take the middle ground and lend out a portion of their shares — like ten or twenty percent? Lucas: I think that's a smart approach. You diversify your risk — you're not fully exposed to a recall delay, and you're not giving the short sellers too much ammunition. And you're still generating meaningful income. The key is to work with your prime broker to set up a lending program that's transparent and compliant. Luna: And this connects to something we talked about in a previous episode — how founders use put options to hedge their windfall. But this is different, because you're not buying protection, you're monetizing what you already own. Lucas: Exactly. And there's another twist — some founders use lending as a way to defer capital gains. If you can generate income from your shares without selling them, you can push the taxable event further down the road, which can be a big deal if you're in a high tax bracket. Luna: So we're talking about a tool that's part income strategy, part tax strategy, part market signal. It's almost a hidden lever that most founders don't even think about. Lucas: Right. And it's especially relevant right now because we're seeing some notable moves in the market. Coinbase, for example, is up twenty-two percent over the last five days — that kind of volatility often attracts short interest. A founder in that position could be earning serious fees while the stock is choppy. Luna: But do you need to be in a stock with high short interest to make this worthwhile? If the borrow fee is only one or two percent, is it still worth the hassle? Lucas: If your position is large enough, even a low fee adds up. We're talking about founders with tens of millions of dollars in stock. A one percent annual fee on a fifty million dollar position is five hundred thousand dollars a year. That's not chump change. Luna: That's a strong point. And it's a low-effort strategy once it's set up — your broker handles the lending, you just receive the payments. Lucas: And that's the beauty of it — it's almost passive income. You set up a lending arrangement, and your prime broker does the work. You don't have to actively manage it, which is perfect for a founder who's still running the company and doesn't want to obsess over the stock price. Luna: This feels like something that could be really valuable for founders in the current AI boom, especially with all these startups going public at high valuations. They're sitting on huge positions, and the lockup is a long wait. Lucas: Absolutely. And we're seeing headlines about AI startups like General Intuition raising at a six billion dollar valuation to push into robotics. When those companies eventually go public, their founders will have enormous locked-up positions. Stock lending could be a way for them to generate income during that lockup period. Luna: It's almost like a bridge to liquidity. Lucas: Exactly. And it's a way to stay engaged with your wealth without having to sell a single share. That's something that aligns with the long-term mindset of many founders. Luna: I think we should mention that we don't run ads on this show. If you find these conversations useful, and you want to support keeping it that way, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's the only way we keep this ad-free — listener support. We appreciate that. Luna: And it's a small gesture, but it means a lot to us. Lucas: So, back to stock lending — one thing I want to stress is that it's not for everyone. If you're a founder who might want to sell quickly if the stock surges, lending could be a constraint. You have to weigh the income potential against your flexibility. Luna: And there's also the optics. If a founder is lending shares, it could be seen as a lack of confidence — like they're enabling short sellers. Lucas: That's a valid concern, but I think it's overblown. In practice, founders who lend shares often do it quietly, and the market doesn't really focus on it. What matters is the long-term performance of the company. Luna: So, what would you say to a founder who's listening and thinking, 'I have locked-up shares, should I look into this?' Lucas: My advice is to talk to your prime broker or a trusted financial advisor. Set up a lending program that fits your risk tolerance and your liquidity needs. Start with a small portion of your position to see how it feels, and then scale up if it works for you. Luna: And be aware of the tax implications — you'll need to report that lending income, and it might be ordinary income, not capital gains. Lucas: Exactly. It's not a strategy to jump into without professional advice. But for the right founder, it can turn a dormant asset into a productive one. Luna: It's one of those tools that's hidden in plain sight. I feel like we've given our listeners a new lens on founder liquidity today. Lucas: And that's the goal — to demystify these exit strategies. Stock lending might not be the flashiest topic, but it's a practical one that can make a real difference to a founder's financial planning. Luna: Definitely. And if any of you have tried this or have questions, we'd love to hear from you. Lucas: Until next time, keep building.