Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use SPAC Warrants as a Second Liquidity Window
Transcript
- Lucas: So you've taken your startup public through a SPAC merger, the champagne's been drunk, and you're sitting on a pile of warrants you barely understand. Today we're going to talk about why those warrants might be your second liquidity window — and why most founders leave money on the table. Luna: We've talked a lot about lockups and secondary sales, but warrants are this weird middle ground that almost nobody digs into. Lucas: Right. And the timing is interesting because we're recording on August fifteenth, 2026, and the last five days have been a mixed bag for tech. Amazon's down about five and a half percent, Microsoft's off two, while NVIDIA is up three and a half. That kind of volatility is exactly what makes warrant pricing tricky — and why founders need a plan before the stock moves. Luna: So what exactly is a warrant in the SPAC context? I think a lot of listeners hear the term and just think 'fancy option.' Lucas: That's not a bad shorthand. A warrant gives you the right to buy a share of stock at a fixed price, usually within a certain window. In a SPAC deal, the sponsor and sometimes the founders get warrants as a sweetener. They're often structured with a strike price, say eleven dollars and fifty cents, and they typically have a five-year life. But here's the kicker: they're often callable by the company if the stock trades above a certain level for a period of time. Luna: Callable meaning the company can force you to exercise early or lose them? Lucas: Exactly. That's the redemption clause. If the stock stays above ten dollars for twenty out of thirty trading days, the company can call the warrants. You either exercise — pay the strike price and become a shareholder — or they're redeemed for pennies. And most founders don't read that fine print until it's too late. Luna: I've seen that happen. A founder I know merged with a SPAC in 2021, had warrants that were deep in the money by 2023, but he was so focused on the lockup that he ignored the redemption notice. He lost out on a six-figure upside because he didn't respond in time. Lucas: That's the cautionary tale. But let's talk about why warrants can be a genuinely useful tool, not just a trap. For a founder who wants to maintain upside but needs some cash before the lockup ends, warrants can be sold in the open market — they trade separately from the common stock. That gives you a liquidation event without selling your actual shares. Luna: So you can monetize the warrants early, while keeping your stock — that's a nice hedge if you're worried about the share price dipping. Lucas: Right. And that's especially relevant right now. Look at the market: a few weeks ago, Amazon was riding high, and now it's down five and a half percent in five days. If you're a founder in a SPAC, you might be looking at your stock and thinking, 'I don't want to sell my core equity at this level.' Selling warrants gives you liquidity without giving up ownership. Luna: But aren't warrants also dilutive? If you exercise, the company issues new shares, which dilutes everyone else. Lucas: Yes, absolutely. That's the flip side. When you exercise a warrant, the company creates new shares, so existing shareholders — including the other founders, employees, and investors — get diluted. That's a real cost, and it's one reason some companies prefer to call the warrants and force exercise in a controlled way. But for the founder holding them, the dilution is already baked into the deal you signed. You just need to decide whether the upside of exercising outweighs the dilution you're imposing on the cap table. Luna: So it's really about reading the warrant agreement carefully. What are the key terms a founder should look for? Lucas: First, the exercise price — that's obvious. Second, the expiration date. Third, the redemption clause: under what conditions can the company call them? Fourth, whether there's a cashless exercise provision. Sometimes you don't need to pay the full strike price in cash; you can net out the shares based on the current price. That's a huge deal if you don't have a million dollars lying around. Luna: Cashless exercise sounds like a game-changer for founders who are cash-poor but equity-rich. Lucas: It is. And it's often negotiated in the merger agreement. But here's the thing: the default is usually cash exercise. If you don't ask for cashless, you might not get it. That's a classic negotiation point that founders overlook because they're focused on the headline valuation. Luna: Let's talk about a real-world example. NVIDIA's up three and a half percent this week — if a founder had warrants on a stock like that, they'd be feeling pretty good right now. Lucas: Sure. But the key is to think about the volatility, not just the direction. Warrants are essentially long-dated options, so their value is sensitive to implied volatility. When Amazon drops five percent in a week, the volatility spikes, which can actually increase the warrant's value even if the stock is falling. That's counterintuitive for a lot of founders who only watch the share price. Luna: So a falling stock doesn't necessarily mean your warrants are worthless. Lucas: Exactly. And that's why it's worth understanding the option-pricing math, even if you're not a quant. A simple approach: look at the warrant's delta — how much it moves for a one-dollar change in the stock. In a high-volatility environment, that delta can be surprisingly high, even out of the money. Luna: But for the average founder, isn't it simpler to just sell the warrants as soon as they're freely tradeable? Lucas: That's one strategy, and it's not wrong if you need cash or you're risk-averse. But it can leave a lot on the table. I've seen founders who sold warrants at two dollars a pop in the first month after merger, only to see the stock double and the warrants go to fifteen. It's a matter of your risk tolerance and your belief in the company's trajectory. Luna: So there's a balance between locking in liquidity and leaving upside on the table. Lucas: Right. And one way to think about it is to treat warrants as a separate decision from your core equity. You've already got your stock, which is your long-term bet. Warrants can be your speculative kicker — you can hold them for upside, but you can also sell a portion to hedge your downside. A lot of founders do a mix: sell half to lock in some cash, hold half for the long run. Luna: That sounds like a sensible middle ground. Have you seen any founders use warrants to effectively create a collar or a hedge on their stock position? Lucas: Yes, though it's more common with options than warrants. But the concept is the same: if you're worried about your stock dropping but you can't sell because of lockup, you can use your warrants as a partial hedge. If the stock tanks, your warrants lose value too, so that's not a perfect hedge. But if you structure it right, you can sell some warrants to buy put options on the stock — though that's getting into advanced territory. Luna: Let's talk about the tax side. When you exercise a warrant, is there an immediate tax event? Lucas: That's a great question, and it's one that trips up a lot of founders. When you exercise a warrant, you're buying the stock at a discount to market, and that discount can be treated as taxable compensation in some cases — especially if the warrants were issued as part of your founder shares. The IRS has specific rules on this, and it can get complicated. I always recommend getting a tax advisor who understands SPACs before you exercise. Luna: Because the last thing you want is a surprise tax bill in April. Lucas: Exactly. And there's also the holding period for capital gains. If you exercise and hold the stock for a year, you get long-term rates. But if you sell immediately, it's short-term. So there's a trade-off between timing your exit and tax efficiency. Luna: I'm curious — what's the typical mistake you see founders make with warrants, besides ignoring the redemption notice? Lucas: The biggest one is assuming the warrants are worthless when the stock is below the strike price. That's not necessarily true. Like I said, there's time value and volatility value. I've seen warrants trade at three or four dollars when the stock was eight, just because there was a lot of time left and high volatility. Selling them for a few cents is a mistake. Luna: So even out of the money, they can have value. That's a good reminder that it's not just about the current stock price. Lucas: Right. And the second big mistake is not planning for the redemption. If the stock is trading above ten dollars, the company can call the warrants at any time. You need to be watching for the notice and have a decision ready. That means knowing your exercise price, your cash position, and whether you want to exercise or sell. Luna: And what about the post-merger lockup? Do warrants have their own lockup? Lucas: Usually they're freely tradeable immediately after the merger, because they're considered separate securities. But there can be restrictions in the merger agreement, so it's worth checking. Some founders are surprised to find they can sell warrants while their common stock is still locked up. That's another liquidity window. Luna: That's a huge point. You can get cash earlier than you thought. Lucas: Exactly. And in a market like this, where some tech names are pulling back, having that early liquidity can be a real relief. It gives you flexibility to diversify or just to have cash on hand without violating your lockup on the common. Luna: Let's bring it back to the listener. If you're a founder in a SPAC right now, what's the one action item you'd give them? Lucas: First, pull up your warrant agreement and find the redemption clause. Know exactly at what price and under what conditions the company can call the warrants. Second, check your expiration date — don't let them lapse. Third, decide on your strategy: hold, sell, or exercise. And if you're thinking about exercising, look into cashless exercise and the tax implications. Luna: And if you need help, there are plenty of resources out there — but also, this podcast is one of them. We've covered a lot of exit topics, and we're glad you keep listening. Lucas: Yeah, and on that note — these conversations are ad-free because of listeners like you who drop a couple of dollars a month. If you've gotten something out of this, you can find us at buy me a coffee dot com slash fexingo. It genuinely makes a difference. Luna: It really does — it keeps the lights on and the coffee hot. Lucas: So, back to warrants. One more thing that's worth mentioning: the accounting treatment. Some companies have had to restate their financials because they didn't properly classify warrants as liabilities. That's a whole other headache. If you're on the board or the management team, make sure your auditors get that right from day one. Luna: That's a good practical tip — warrants aren't just a founder thing, they affect the whole company's financial reporting. Lucas: Absolutely. So to wrap up: warrants can be a second liquidity window, a hedge, or a trap — it all depends on how well you understand the terms. Don't let them sit unnoticed in your brokerage account. They're real assets with real value, and they deserve as much attention as your stock. Luna: And if you're in the middle of negotiating a SPAC deal, make sure you ask for cashless exercise and check the redemption clause before you sign. Lucas: Exactly. Until next time, keep your options open — literally.