Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Rule 144 Holds to Free Up IPO Cash
Transcript
- Lucas: If you're a founder who just rang the bell at an IPO, you probably think you're stuck waiting for that 180-day lockup to expire before you can sell a single share. Luna: And that's usually true for the first few months. But there's a workaround that's been getting more attention lately. Lucas: Right — Rule 144. It's an SEC rule that's been on the books for decades, but founders and early investors are using it more aggressively now to get liquidity before the lockup ends. Luna: And I think the reason it's gaining traction is pretty straightforward. The market's been volatile — look at the S&P 500 down about three percent in the last five days, according to our data. If you've got millions in restricted stock, you don't want to wait six months to find out what it's worth. Lucas: Exactly. So Rule 144 allows holders of restricted securities to sell them publicly, but only after meeting certain conditions. The key one is a holding period. For a company that's been reporting its financials for at least 90 days — which most pre ipo companies haven't — the holding period is six months. But here's the thing: that six-month clock can start ticking before the IPO. Luna: Wait — so the holding period can run during the quiet period, before the company even goes public? Lucas: Yes, if the company has been an SEC reporting company for at least 90 days before the IPO. That's rare, but it happens. More commonly, founders who bought shares in a financing round can start the six-month clock from the date they paid for those shares. So if they invested in a Series B six months before the IPO, they may already satisfy the holding period on day one of trading. Luna: But then the lockup agreement with the underwriter still applies. So they can't actually sell until the lockup expires, right? Lucas: Right — the lockup is a separate contractual restriction. But some underwriters are willing to release a small percentage of shares early, especially for founders who want to diversify. And Rule 144 provides the legal framework for that sale. Luna: How small is small? I remember reading that in the Reddit IPO earlier this year, some early employees were allowed to sell a portion of their shares right after the lockup expired, but not all. Lucas: It varies. Typically, underwriters will let you sell up to one percent of the outstanding shares in any three-month period under Rule 144. But they can impose stricter limits. The key is that the sale has to be reported to the SEC on Form 144, which becomes public. Luna: So it's not exactly anonymous. The market sees you're selling. Lucas: Right, and that can be a signal. If a founder sells even a small amount, investors might think, 'Why are they cashing out? Do they know something I don't?' So there's a communication challenge there. Luna: But for a founder sitting on a concentrated position — say they own twenty percent of a company that just IPO'd at a multi-billion valuation — selling even one percent to buy a house or diversify into an index fund could be a huge personal de-risking move. Lucas: Absolutely. And the IRS actually encourages it, in a way. If you sell within one year of the IPO, your gains are taxed as short-term capital gains — higher rate. So waiting a full year might be better from a tax perspective. But Rule 144 doesn't care about taxes; it just governs the securities law side. Luna: Let's talk about a concrete example. Arm Holdings IPO'd in September 2023. SoftBank owned most of the shares, but there were early investors and employees with restricted stock. Did any of them use Rule 144 to sell early? Lucas: I don't have specific filings in front of me, but it's likely. Arm's lockup was 180 days, and the stock traded in a range after the IPO. If an early employee had bought shares in a pre ipo round more than six months before the IPO, they could have sold under Rule 144 as soon as the lockup expired — or potentially earlier if the underwriter granted a release. Luna: But getting that release is the hard part. Underwriters don't want insiders selling too soon because it puts downward pressure on the stock. Lucas: True. But there's a nuance: if the sale is part of a pre-arranged trading plan under Rule 10b5-1, the underwriter might be more comfortable because it shows the sale was planned months in advance, not based on inside information. Luna: So a founder could set up a 10b5-1 plan during the quiet period, start the Rule 144 clock, and then sell on a scheduled date after the lockup expires? Lucas: Exactly. And that's becoming more common. It gives the founder certainty and the market less surprise. Luna: It's smart planning. But what about the one percent volume limit? If the company is trading thinly, that one percent might not be much. Lucas: Right. The one percent is calculated on the outstanding shares, not the float. So for a company with a billion shares outstanding, one percent is ten million shares. But if the average daily volume is only a million shares, selling ten million over three months would still be noticeable. Luna: So you have to be strategic. Maybe sell smaller amounts more frequently. Lucas: Or use a block trade with an investment bank that can place the shares with institutional investors without moving the market too much. That's actually how many large insider sales happen. Luna: So what's the takeaway for a founder or early employee listening? If you're pre ipo or just went public, what should you do? Lucas: First, understand your holding period. If you bought shares in a financing round, track the date. Work with a securities lawyer to confirm when you satisfy Rule 144. Second, talk to your underwriter about lockup release policies. Some are more flexible than others. And third, consider setting up a 10b5-1 plan early. Luna: And don't forget the tax implications. Maybe wait a year for long-term capital gains if you can. Lucas: Right. But the main point is: the lockup isn't always an iron wall. Rule 144 offers a legal path to earlier liquidity if you plan ahead. Luna: And if today's conversation saved you a few hours of research or helped you think about your own exit strategy, that's exactly the kind of thing that makes producing this show worth it. Lucas: We keep Fexingo ad-free because of listeners who find value in it. If this episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. Luna: It's a small gesture that goes a long way in helping us keep digging into these niche topics that matter to founders. Lucas: So back to the practical side — one more thing I want to mention. When you sell under Rule 144, you have to file Form 144 with the SEC. That form becomes public, so your sale will show up on EDGAR. But that's not necessarily bad. It shows the market you're diversifying in a planned, transparent way. Luna: And it can actually be a positive signal if the market sees you're selling only a small portion and holding the rest. Lucas: Exactly. So don't be afraid of the filing. Use it to tell your story. You're not bailing; you're just aligning your personal finances with a long-term hold. Luna: Alright. I think we've covered the essentials. For anyone navigating an IPO or planning one, Rule 144 is a tool worth knowing. Lucas: Agreed. And we'll keep tracking how these rules evolve as more tech companies go public in this environment.