Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Secondary Sales Became the Standard Pre-IPO Exit
Transcript
- Lucas: So there's this moment that almost every founder hits, usually about six to twelve months before they even think about filing for an IPO. They've got a billion-dollar valuation on paper, but their personal net worth is still mostly theoretical. And increasingly, the answer isn't to wait for the IPO lockup to expire. It's a secondary sale. Luna: A secondary sale — meaning they sell some of their existing shares to outside investors before the company goes public. It's become almost standard practice now. Lucas: Exactly. And it's not just founders — early employees, angel investors, even some late-stage VCs use it to get liquidity without waiting for an IPO or acquisition. What used to be a niche, almost desperate move is now a deliberate part of the exit strategy. Luna: And it's worth noting — this shift didn't happen overnight. It really picked up steam around 2020, 2021, when companies like SpaceX and Stripe started doing massive secondary rounds. That legitimized the whole concept. Lucas: Right. SpaceX has been doing secondary sales for years — employees and early investors selling to new funds. And it's not just the high-profile ones. There are now dedicated platforms — Forge Global, Nasdaq Private Market — that facilitate these trades. It's a whole ecosystem. Luna: And that ecosystem is thriving partly because companies are staying private longer. The average time from founding to IPO is now over eleven years. So if you're an early employee who joined when the company was worth 50 million, and now it's worth 50 billion, you might not want to wait another three years to cash out. Lucas: Exactly. And that brings up a key point — pricing. In a secondary sale, how do you price shares of a private company? It's not like there's a ticker symbol. So typically, the company's most recent 409A valuation sets a floor, but the actual transaction price can be at a discount or a premium depending on demand, the size of the block, and the buyer's conviction. Luna: And sometimes there's a 'liquidity discount' — buyers want a break because they're taking on the risk that the company never goes public, or that the IPO is below expectations. Lucas: Right. But what's interesting is that in hot companies, the secondary market can actually trade above the last primary round valuation. That happened with SpaceX — some secondary trades were at prices implying a higher valuation than the last funding round. Luna: So the secondary market becomes a kind of real-time price discovery mechanism, even before the IPO. Lucas: Exactly. And look — since we're talking about real markets, I want to circle back to something that's actually in the data today. Airbnb stock is up over 8 percent in the last five days. That's not directly about secondary sales, but it shows the appetite for travel tech and for companies that have already gone public. That positive sentiment often spills over into the private secondary market for similar companies. Luna: So when a comp like Airbnb jumps, it probably makes buyers more willing to pay up for shares of a private travel startup in a secondary trade. Lucas: Exactly. And speaking of the market — you know, it's funny. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds us making this many of these episodes. No ads, just listeners who find the show useful. Luna: Yeah, it's a small group but it makes a huge difference. Keeps everything independent and focused on what matters. Lucas: Anyway, back to secondary sales. One of the biggest advantages for founders is that they can diversify their personal holdings without sending a signal to the market. If a founder sells shares in the secondary market, it's usually not seen as a vote of no confidence — because everyone understands the need for liquidity. Luna: But it can still be tricky. Some investors have anti-dilution or right-of-first-refusal clauses that can complicate a secondary sale. And if the company itself is doing a primary round at the same time, the pricing can get messy. Lucas: Right. And there's the question of volume. If too many employees try to sell at once, the price can drop sharply. That's why many companies structure these sales as 'tender offers' — a set window where employees can offer shares, and the company or a designated buyer purchases them at a fixed price. Luna: And those tender offers have become more common. Companies like Palantir and Asana did them before their direct listings. Lucas: Exactly. And that brings up another angle — the tax implications. When you sell secondary shares, you're typically paying capital gains tax on the difference between your strike price and the sale price. If the company's value has gone up a lot, that can be a big tax bill. But it's still better than waiting and possibly seeing the value drop. Luna: What about the difference between selling as a founder versus an early employee? Founders usually have more negotiating power and can often command a better price. Lucas: That's true. Founders tend to sell in larger blocks, so they can work with investment banks or dedicated secondary funds to get a better deal. Employees, on the other hand, often sell through platforms that aggregate small lots, and they might get a slightly lower price per share. But it's still a huge liquidity event for them. Luna: And the secondary market isn't just for pre ipo companies. We're also seeing it for companies that have gone public but are still under lockup. There are derivative products that let employees hedge their exposure before the lockup expires. Lucas: That's a whole separate episode — we actually covered lockup derivatives back in episode 51. But yeah, the secondary market is now a permanent feature of the startup ecosystem. It's not just an exit — it's a tool for managing risk and liquidity at every stage. Luna: So what's the takeaway for a founder listening? If you're building a company and you think you might want to sell some shares before an IPO, you should start thinking about it early. Talk to your board, understand your cap table, and know what your investors' rights are. Lucas: And don't assume the IPO is the only liquidity event. Secondary sales can let you de-risk your personal finances, take some chips off the table, and still stay fully committed to building the company. It's a mature approach to founder wealth management. Luna: It's also worth noting that the SEC has been paying more attention to secondary markets. There are rules around who can buy and sell, and companies need to be careful not to run afoul of securities laws when facilitating these trades. Lucas: Absolutely. So if you're considering a secondary sale, work with experienced lawyers and brokers. It's not something to DIY. But done right, it can be a game-changer for your financial freedom. Luna: And for the listeners who are investors — the secondary market is a way to get into high-growth companies before the IPO. But it comes with its own risks: less liquidity, less information, and often higher valuations. Lucas: Right. But as the market matures, we're seeing more transparency, more standardized processes, and more participants. It's becoming a legitimate asset class. And that's good for founders, employees, and investors alike. Luna: I think that's a great note to end on. Secondary sales are here to stay, and they're reshaping how we think about startup exits. Lucas: Yeah. So whether you're a founder thinking about your first liquidity event, or an investor looking for pre ipo exposure, the secondary market is worth paying attention to. Thanks for listening, and we'll catch you next time.