Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Are Using Direct Listings to Skip the IPO
Transcript
- Lucas: Luna, every few months, I see a headline about some big name company going public via direct listing. Spotify did it. Coinbase did it. Now I'm hearing whispers that several late-stage startups are planning to skip the traditional IPO entirely. So I want to drill into a specific number today: the SEC's rule change from early 2026 that removed the requirement for a 'cash-out' cap in direct listings. Luna: Remind me what that cap was. I remember the old rules said you couldn't sell more than a certain percentage of shares in a direct listing, right? Lucas: Exactly. Before the change, the SEC capped the number of shares existing shareholders could sell in a direct listing at around 20 or 30 percent depending on the structure. The logic was protecting new investors from too much sell pressure. But the rule change this past February 2026 removed that limit entirely. Now founders and early investors can sell 100 percent of their shares on day one if they want. Luna: That's huge. So a founder who's been holding for a decade can cash out completely the day the stock starts trading. No lockup, no staged sell-down. Lucas: Right. And that's exactly what a couple of companies are rumoured to be doing later this year. I can't name them because nothing's filed yet, but the pattern is clear. The direct listing structure is becoming the default for companies that don't need to raise primary capital — they just want a liquid market for existing shares. Luna: Which naturally makes you wonder: why would anyone still do a traditional IPO? The fees alone — underwriting fees average 4 to 7 percent of the total offering. On a billion dollar deal, that's forty to seventy million dollars you're handing to banks. Lucas: And that's not including the underpricing. IPOs are famously priced below where the market values them, leaving money on the table for the first day pop. Studies from Jay Ritter's work show the average first day pop is about 15 percent for US IPOs over the last decade. That's another hundred fifty million on a billion dollar offering. Luna: So by skipping the banks and using a direct listing, you avoid both the underwriting fee and the intentional underpricing. Spotify saved roughly thirty million dollars in fees alone. And because the opening price was set by auction — the NYSE's opening cross — the market found a price that was fair from day one. Lucas: Let's look at the numbers. Spotify listed on April 3rd, 2018, at a reference price of $132 per share. The opening trade was $165.90, so a 25 percent pop. But here's the thing — that pop wasn't money left on the table because the reference price was non-binding. The actual price was discovered in the opening auction. Existing shareholders who sold at $165.90 got the full market price. Luna: Whereas in a traditional IPO, the banks price the deal at $132, the stock opens at $165, and the issuer misses out on that 25 percent gain. That's billions in aggregate value left on the table over the years. Lucas: Yet despite the clear math, direct listings remain a niche. In 2025, there were only 12 direct listings on US exchanges, compared to over 200 traditional IPOs. Why? One big reason is that most companies need to raise money in the public offering. They need the capital to grow. Direct listings don't raise new capital — they just convert existing shares to public ones. Luna: So if you're a cash-burning startup that needs fifty million dollars for R&D, a direct listing doesn't help. You still need a traditional IPO or a later follow-on offering. Lucas: Precisely. That's why the companies that have done direct listings — Spotify, Slack, Coinbase, Palantir — were all cash-rich at the time. Spotify had over a billion in cash. Coinbase had over a billion. Palantir had over two billion. They didn't need the money. They just wanted a liquid market for employees and early investors. Luna: And now with the SEC rule change, those cash-rich companies have even more flexibility. But what about the smaller startups? The ones that aren't household names but have solid businesses? Lucas: That's the tension. The NYSE and Nasdaq have both proposed 'primary direct listings' — a hybrid that lets you raise capital while also listing existing shares. The SEC approved that structure in 2020, but it hasn't taken off. Only one company, the music royalty platform Rockstar, used it in 2025, raising just forty million. Luna: So the banks still control the pipeline for capital formation. If you need money, you go to them, and they'll steer you toward the traditional IPO where they earn their fee. Lucas: And the banks have a powerful incentive to protect that model. The top five underwriters — Goldman, Morgan Stanley, JPMorgan, Bank of America, Citigroup — earned an estimated 4.5 billion dollars in IPO fees globally in 2025. They're not going to roll over and let direct listings take that revenue. Luna: There's also the question of price stability. In a traditional IPO, the underwriters assign a 'stabilisation' syndicate that buys shares if the price drops below the offer price in the first 30 days. Direct listings don't have that backstop. So there's more volatility risk. Lucas: But honestly, that stabilisation is mostly a fig leaf. Studies show it rarely kicks in for more than a few days, and it doesn't prevent long term declines. And in a direct listing, the opening cross sets a price based on real supply and demand, which is arguably more accurate than a banker's estimate. Luna: Let's talk about the founder perspective. If you're a founder sitting on 20 percent of a company valued at ten billion pre ipo, and you want to sell half your stake on day one to buy a house, diversify, whatever — a direct listing gives you that freedom. A traditional IPO would lock you up for six months, and even then you'd sell in stages to avoid spooking the market. Lucas: And that lockup creates an overhang. Everyone knows insiders are eager to sell, so the stock trades at a discount until the lockup expires. Direct listings eliminate that discount entirely. Coinbase's stock, for instance, had no lockup expiry event because there was no lockup. The price reflected all available supply from day one. Luna: I see a lot of founders on Twitter now openly saying they'll choose a direct listing if they can. The narrative has shifted from 'is this a viable alternative?' to 'why would I do an IPO if I don't have to?' Lucas: And that's partly because of the success stories. Palantir listed on the NYSE in September 2020 via direct listing at a reference price of $7.50. The stock opened at $10 and closed at $9.50. Not a huge pop, but orderly. And insiders sold billions of dollars worth of shares in the following months without any lockup constraints. Luna: But Palantir's stock has been volatile. It's up and down. Does that volatility reflect the lack of stabilisation? Lucas: Partly, but mostly it reflects the nature of the business. Palantir is a high growth, high controversy company. Its volatility isn't a function of listing mechanism; it's a function of the business itself. Compare Palantir to Spotify — Spotify's stock has been relatively stable post-direct listing, with a beta around 1.2, similar to tech peers. Luna: So the mechanism itself doesn't cause volatility. What about the role of the exchange? The NYSE and Nasdaq both compete for direct listings. The NYSE has done most of them. They've invested in the technology to run the opening cross smoothly. Lucas: And the SEC rule change has intensified that competition. Both exchanges have proposed new listing standards that make it easier for direct listing companies to qualify. For example, Nasdaq now allows companies with a market cap of at least $500 million and 60 percent of shares held by public investors to skip the traditional roadshow. Luna: That's a big shift. The roadshow is a grueling two week process where management pitches to institutional investors. It's expensive and time consuming. Skipping it saves maybe a million dollars in legal and travel costs, plus weeks of executive time. Lucas: And for companies that are already well-known — like the next big AI startup or fintech — the roadshow is arguably redundant. Institutional investors already have their own models. They don't need management to explain the business. Luna: Which brings us back to the cash-rich, well-known company thesis. The companies that benefit most from direct listings are exactly the ones that don't need the capital and don't need the marketing. But what about the rest? Is there a path for mid-sized companies? Lucas: I think the SEC's next frontier will be allowing direct listings that include a primary component more easily. Right now the primary direct listing has complicated accounting and legal requirements. If the SEC simplifies that, you could see a wave of companies raising, say, $100 million in a direct listing while also letting insiders sell. Luna: And that would truly democratise the model. Not just for unicorns, but for 'mini-unicorns' — companies valued at 500 million to a billion. Lucas: Honestly, if this conversation was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. We keep the show ad-free because of listeners like you, and it genuinely helps us keep digging into these topics. Luna: Yeah, it's a small thing that makes a big difference for us. And we really appreciate it. Lucas: Alright, so back to the numbers. In the first quarter of 2026, we saw four direct listing filings, which is already more than any full year before 2020. If the trend continues, we could see 20 to 25 direct listings this year, which would be a record. Luna: And a few of those are likely to be from the AI space. Companies like OpenAI have been mentioned, though they've denied any immediate plans. But with their cash reserves and brand recognition, they'd be a perfect candidate. Lucas: If OpenAI or Anthropic or any of the big AI labs went public via direct listing, it would be a watershed moment. It would validate the model for a whole generation of tech companies. And it would put even more pressure on the banks to adapt. Luna: The banks are already adapting. Goldman launched a 'direct listing advisory' practice in 2024. They're basically saying, if you're going to do a direct listing, at least let us advise you on the structure and the marketing. Lucas: Cannibalising your own fee pool. That's telling. They know the trend is real. Luna: So what's your prediction? In five years, what percentage of US listings will be direct listings? Lucas: I'll say 20 percent. That might sound low, but remember that the vast majority of companies need to raise capital. For those, the traditional IPO will remain the default. But for the top tier — the cash-rich, well-known companies — direct listing will be the standard. And that top tier makes up a disproportionate share of market cap. So by dollar value, maybe 30 percent of capital raised in IPOs could shift to direct listings, even if it's only 20 percent of the count. Luna: That's a meaningful shift. And it means founders have more choices than ever. Which is ultimately a good thing for the ecosystem. Lucas: The key takeaway for any founder listening: if you have the cash reserves and the brand recognition, a direct listing can save you tens of millions in fees and give you full liquidity on day one. But if you need capital, the traditional IPO still works. The important thing is to know the options and calculate the tradeoffs. Luna: And stay tuned — as more companies go this route, we'll get better data on long-term performance. That'll help everyone make smarter decisions. Lucas: Thanks for joining us on The Startup Exit Podcast. We'll be back next time with another deep dive.