Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Rolling Equity to Navigate Delayed Exits
Transcript
- Lucas: You've raised a bunch of capital, you've got a great team, and the plan was to go public in 2025. But here we are, July 2026, and the IPO window is still more of a crawl space. So what do you do when the exit keeps getting pushed out? Luna: That's the question a lot of founders are sitting with right now. And the answer isn't just 'wait.' Some are getting creative with something called structured rolling equity. Lucas: Exactly. Rolling equity is a way to give employees equity-like upside without triggering a taxable event right now. Think of it as a deferred compensation plan that tracks the company's future value. It's not a new concept, but it's having a moment because the timeline to liquidity has stretched so much. Luna: And the key word there is 'structured.' You can't just hand out phantom stock and hope for the best. The IRS has rules, especially under Section 409A, which governs nonqualified deferred compensation. Lucas: Right. Section 409A requires that the terms of the deferral be set in writing before the services are performed, and it imposes strict distribution rules. If you mess that up, you're looking at immediate taxation plus a 20 percent penalty. So founders need to be careful, but when done right, rolling equity can be a powerful retention tool. Luna: I want to get into a specific example. You mentioned a founder we talked to last month—she's running a SaaS company valued around two billion dollars, and her CTO was getting restless. Lucas: Yeah, the CTO had been there since the Series A, and by late 2024, he was getting offers from public companies with liquid stock. The founder knew she couldn't match that with illiquid common shares. So she set up a rolling stock appreciation rights plan, or SARs. Essentially, the CTO gets the appreciation in value of a certain number of shares, but he doesn't actually own the shares. The payout happens at a liquidity event—IPO, acquisition, or a specified date. Luna: And because it's structured as a SAR, it can be settled in cash or stock, and it's taxed as ordinary income only when he receives the payout. So he stays, gets the upside, and the company keeps its cap table clean. Lucas: Exactly. The beauty of rolling equity is that it can be refreshed annually—hence 'rolling.' So each year, the founder grants a new tranche of SARs based on the current fair market value. That way, the employee always has forward-looking incentive, even if the exit keeps getting delayed. Luna: Let's talk about valuation. How do you determine the grant price for these SARs when the company is private and hasn't had a 409A valuation in a while? Lucas: Great question. The company needs to get a fresh 409A valuation from a qualified appraiser. In this market, with private company valuations under pressure, that might actually work in the founder's favor. If the valuation dips, the grant price is lower, which means more potential upside for the employee. But you have to be careful not to trigger a down-round optics issue. Luna: And that's where the 'structured' part comes in. Some companies are using formula-based valuations tied to revenue or EBITDA multiples, rather than a single point estimate. That gives more flexibility. Lucas: Right. And it's not just retention. Rolling equity can also be used to attract new talent who might be wary of joining a company with an uncertain exit timeline. You can offer them a SAR that vests over four years with a catch-up provision if the company's value jumps. Luna: Which brings up another point: the risk of overhang. If too much rolling equity is outstanding, it can dilute the founders and existing shareholders at the time of exit. But since SARs are settled in cash or stock from a pool, it's more controlled than issuing actual options. Lucas: Yeah, the company usually reserves a percentage of the exit proceeds for SAR payouts, often in the range of 5 to 15 percent. That's negotiable. But the key is that it's a liability on the balance sheet, not equity dilution. So it doesn't affect the capitalization table in the same way. Luna: Let's look at some public comps. Companies like Stripe and Databricks have used similar structures internally, though they don't disclose details. But the fact that they're still private and still retaining top talent tells you something. Lucas: Right. Stripe has been private for over a decade now, and they've managed to keep key engineers despite the liquidity drought. Rolling equity is likely part of that story. And with the current market environment—look at Palantir up 14.5 percent in the last five days, or Rivian up 17.8 percent—there's clearly investor appetite for growth stories. But the IPO window is still tight for most companies. Luna: So if you're a founder listening, what's the first step? Do you go to your board and propose a rolling equity plan? Lucas: I'd start with a compensation consultant who specializes in 409A matters. Then you need board approval, and you'll want to document everything meticulously. The plan should specify the trigger events, the valuation methodology, and the settlement terms. And you have to communicate it clearly to employees—this isn't a substitute for an eventual IPO, it's a bridge. Luna: Speaking of bridges—if this kind of deep dive on exit strategy is useful for what you're building or running, that's the reason we do this show. And honestly, if today's episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. It's a small way to keep these conversations going. Lucas: Yeah, listener support is what keeps this ad-free and focused on the details that matter. So thanks for that. Now, back to rolling equity—one more nuance: the tax treatment for the company. The company gets a deduction when the SAR is paid out, but only if it's structured as a nonqualified plan. And the timing of the deduction can be tricky. Luna: Right, because the deduction is generally allowed in the year the employee includes the amount in income. So if you have a big exit year, you might want to accelerate the deduction, but the rules are strict. Lucas: Right. And one more thing: rolling equity isn't just for tech. I've seen it used in biotech and even in some consumer goods companies where the exit horizon is long. The principles are the same. Luna: So to wrap up: if your exit is delayed, don't just sit on your hands. Structured rolling equity can buy you time, keep your team intact, and align incentives for the long haul. Just make sure you've got good legal and tax advice. Lucas: Well said. And we'll be back next episode with another angle on founder liquidity. Until then, keep building.