Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Secondaries for Pre-Exit Liquidity
Transcript
- Lucas: So earlier this week, I was looking at the secondary market data for late-stage startups, and one number jumped out: in the second quarter of this year, the volume of structured secondary sales by founders hit an all-time high — roughly four point seven billion dollars in Q2 alone, according to Forge Global. Luna: That's a staggering number. And it makes me wonder — is this a sign that founders are losing faith in the IPO window, or is it just smart wealth management? Lucas: I think it's both, honestly. But let's get specific. Take a founder I spoke with recently — let's call her Sarah. She runs a mid-stage SaaS company, about eighty million in annual recurring revenue, growing thirty percent year-over-year. Last quarter, she sold fifteen million dollars of her personal stake to a crossover fund. The deal was structured as a secondary sale at a twenty percent discount to the company's most recent valuation. Luna: A twenty percent discount — so she took a haircut on paper value to get actual cash. Why not just wait for an IPO? Lucas: Because the IPO market is unpredictable. Look at the public markets right now. As of this morning, Tesla is down sixteen percent in the last five days. Shopify dropped nine point four percent. Even Alphabet is off eight point four percent. If you're a founder watching those swings, you have to ask yourself: do I want my entire net worth tied to a company that could get punished by the market on any given week? Luna: Right — and that's where the structured secondary comes in. You get liquidity, but you keep control, you keep your board seat, you keep running the company. It's not an exit. Lucas: Exactly. And that's the key distinction. Sarah didn't sell control. She sold a minority piece of her personal holdings — not company stock, not diluting the cap table. The buyer got a discount for taking the illiquidity risk, and Sarah got fifteen million in the bank, diversified, without triggering a change of control. Luna: So if today was actually useful to you — understanding how founders are navigating this — the way these conversations stay ad-free is listener support. You can buy me a coffee over at buy me a coffee dot com slash fexingo. It's a small gesture that keeps the podcast independent. Lucas: Yeah, we really appreciate it. And it makes a difference. So back to Sarah — she told me the negotiation on the discount took about six weeks. The crossover fund wanted a thirty percent discount initially. She pushed back, showing them her revenue growth and retention metrics. Luna: So how did she justify a smaller discount? Lucas: She offered them a side letter with information rights and a pro-rata participation in the next round. That gave the fund some upside protection. Ultimately they settled at twenty percent. And she structured the deal so that the shares were held in a trust with her voting rights preserved. Luna: That's a detail I want to unpack. Voting rights are often the sticking point in secondaries. How did she keep them? Lucas: She used a vehicle called a voting proxy. The shares were transferred to a trust where she retained the voting rights, but the economic benefit went to the fund. This is common in structured secondaries — you decouple economics from control. The fund gets the financial exposure, the founder keeps the decision-making power. Luna: So the fund is essentially betting on the company's growth, but the founder still steers the ship. That seems like a win-win if the company performs. Lucas: Exactly. And the data backs this up. According to a study by SharesPost, companies where founders used structured secondaries actually had a higher likelihood of reaching a successful exit — IPO or acquisition — within three years. The theory is that founders who de-risk personally are more willing to take strategic risks with the business. Luna: That's counterintuitive — you'd think a founder who already took money off the table would be less hungry. But maybe the opposite is true. Lucas: I think it's because the existential pressure is gone. You're not desperate for an exit to pay off personal debts or fund your lifestyle. You can make decisions that are best for the company long-term, even if they don't juice the valuation in the next quarter. Luna: But there's a risk too — if the company's valuation drops after the secondary, the fund is underwater. And that can create tension. Lucas: Absolutely. I've seen cases where a secondary was done at a certain valuation, then the market turned, and the fund wanted anti-dilution protection or demanded a board seat. That's why the negotiation is so critical. Sarah's deal included a no-shop clause for twelve months, meaning she couldn't do another secondary at a lower price without offering the fund participation. Luna: So the fund gets downside protection too. It's a carefully balanced arrangement. Lucas: Right. And that's the art of the structured secondary. It's not a simple stock sale — it's a bespoke contract that aligns incentives. The discount, the voting rights, the information rights, the anti-dilution, the timing — all of it is negotiated case by case. Luna: And this is happening more now because, as you mentioned, public markets are choppy. But also because there's a huge amount of dry powder in crossover funds. According to PitchBook, crossover funds had over one hundred billion dollars in committed capital as of last quarter. Lucas: That's a massive pool. And they're looking for deals in private companies that could go public eventually. Structured secondaries give them access to high-growth names at a discount, with less competition than a formal funding round. Luna: So for founders, this is a tool that didn't really exist at scale ten years ago. Now it's becoming standard. Lucas: I'd say it's still a privilege of the top tier. For a founder to command a structured secondary, you need a company with strong fundamentals, a clear path to exit, and enough investor interest to create competition. Sarah's company had all three. But for the broader ecosystem, it's a powerful option. Luna: And what about the tax implications? Selling shares before an IPO can trigger capital gains, right? Lucas: Yes, but it's usually long-term capital gains if the shares were held for more than a year. In Sarah's case, she had held her founder shares for over five years, so it was taxed at the favorable rate. But if you do a secondary within a year of the original grant, it could be short-term. Founders need to work with tax advisors on that. Luna: So the timing matters. Do most structured secondaries happen after a Series C or D, when the company is mature but not yet public? Lucas: Typically, yes. The sweet spot is when the company has at least fifty million in recurring revenue and a clear growth trajectory. That's when crossover funds get interested. Earlier stage, the risk is too high for a secondary at a reasonable discount. Luna: I want to bring in another data point: Patreon laid off twenty percent of its workforce this week. That's a company that was once a high-flying private market darling. If you're a founder at a company like that, you might be thinking, 'I should get some liquidity now'. Lucas: Exactly. The Patreon news is a reminder that even companies with strong metrics can hit turbulence. A structured secondary is a hedge against that uncertainty. And we're seeing more founders exercise that option. Luna: But there's a psychological barrier too — selling any shares can feel like a vote of no confidence to employees and investors. Lucas: That's a real concern. Sarah told me she was careful to communicate the rationale internally. She framed it as personal financial planning, not a lack of faith. And she made sure to announce a new product launch the same week to keep the narrative positive. Luna: So it's not just the deal itself — it's the story around it. Lucas: A hundred percent. In venture, perception is reality. If you handle it well, it can actually increase morale — employees see that the founder is thinking long-term, not just cashing out. Luna: What about the size of the sale? Is there a rule of thumb for how much a founder should sell? Lucas: I've seen advisors recommend no more than twenty to thirty percent of a founder's stake in a single secondary. Enough to diversify, not so much that you lose alignment. Sarah sold about fifteen percent of her holdings, which is conservative. Luna: And what happened after her deal? Did the company go on to raise another round or pursue an IPO? Lucas: Actually, they just filed confidentially for an IPO two weeks ago. So the secondary turned out to be a pre ipo step. The crossover fund will likely convert their shares into public stock at the offering and hold through the lockup. Luna: That's the ideal outcome — founder gets liquidity early, fund gets a discount, company goes public. Everyone wins. Lucas: Yeah. And it's a model we're going to see more of as long as public markets stay volatile and private markets have this much capital. For founders, it's worth having in your toolkit. Luna: So the key takeaway: structured secondaries are not just for founders who want to exit — they're for founders who want to stay in the game longer, with less personal risk. Lucas: Well put. And that's the shift we're seeing — from all-or-nothing exits to partial liquidity as a strategic move.