Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Secondary Sales to Price IPOs
Transcript
- Lucas: So Palantir is up more than 16 percent over the past five trading days, and a lot of that momentum traces back to a single mechanism that more founders are using to price their IPOs: the structured secondary sale. Luna: I saw that — they placed about one point two billion dollars worth of existing shares at a hundred and fifteen dollars each, a week before the actual IPO pricing. That feels like a pretty aggressive signal. Lucas: It is, and that's exactly the point. A structured secondary sale — sometimes called a pre ipo placement — lets founders and early investors sell a chunk of their holdings to institutional buyers at a fixed price. That price then becomes a visible floor for the IPO itself. Luna: So it's not just about liquidity — it's about price discovery before the bankers start book building. Lucas: Exactly. In Palantir's case, that hundred fifteen dollar floor gave the underwriters a reference point. The IPO ultimately priced at a hundred twenty, and the stock has traded above that ever since. Compare that to the classic approach where the company and bankers set a range based on comparable companies and hope the market agrees. Luna: And hope is not a strategy. I remember Rivian tried a similar thing back in 2021, but their secondary was smaller and priced at a discount. It didn't create the same anchoring effect. Lucas: Rivian's secondary was around five hundred million at seventy-eight dollars, and the IPO came at seventy-eight — exactly at the secondary price. That worked fine in a hot market, but when the stock fell, investors who bought in the secondary were underwater immediately. Palantir's structure was smarter: they built in a small premium from the secondary to the IPO, so the first public investors saw an immediate paper gain. Luna: That premium is crucial because it signals that demand exceeds supply. It's a confident signal to the market. Lucas: Right. And here's the operational detail that matters: the secondary sale is typically done through a separate S-1 registration or as part of the IPO filing with a selling stockholder provision. The shares are old shares — not newly issued — so the company doesn't raise capital, but it does create a valuation reference. The founders get liquidity, and the company gets a de facto price anchor. Luna: How does the pricing actually work? Is it a negotiated deal with a handful of anchor investors, or is there a book-building process? Lucas: It's mostly negotiated with a small group — typically five to ten large institutional funds. The founder or the lead underwriter shops the block, gets indicative bids, and then sets a single price. The advantage is speed: you can close a secondary in forty-eight hours. The disadvantage is that you're leaving some price discovery on the table — you're not getting the full auction dynamic that a public IPO book build provides. Luna: But in a volatile market, that certainty might be worth more than the last few cents per share. Lucas: Absolutely. And that's why we're seeing more late-stage companies do this. In 2025, about 30 percent of all US IPOs over one billion dollars included a significant secondary component. That's up from about 12 percent five years earlier. Luna: Look, I want to shift for a second — because a lot of our listeners are founders or operators, and these episodes are genuinely useful for what they're building. If that's you, and you've gotten something out of these conversations, a couple of dollars a month is what keeps them ad-free. It's buy me a coffee dot com slash fexingo — seriously, it makes a real difference. Lucas: Yeah, Luna's right. We don't run ads, and listener support is the reason. Even small amounts add up. So thanks to anyone who chips in. Back to the mechanics — one thing that trips up founders is the overallotment option, the greenshoe. Luna: How does that interact with the secondary? Lucas: The greenshoe is usually 15 percent of the base offering. If the secondary is priced at a discount to the expected IPO range, the underwriters can use the greenshoe to cover short positions if the stock pops. But if the secondary is at a premium, the greenshoe becomes less relevant because the stock is already priced for stability. Luna: So the secondary doesn't just set a floor — it also shapes the entire syndicate strategy. Lucas: Exactly. And there's a tax nuance too. When founders sell in a secondary before the IPO, the proceeds are typically taxed as capital gains, not ordinary income, because the shares are held for more than a year. That's a big deal for founders sitting on low-basis stock. Luna: Right, because if you sell in the IPO itself, the underwriters often impose a lock-up — usually 180 days — so you can't sell immediately anyway. The secondary gives you an earlier liquidity window. Lucas: And it avoids the lock-up entirely, because those shares are sold before the IPO closes. The buyer in the secondary isn't subject to the lock-up — they can sell on day one. That's part of why institutional buyers demand a discount: they're taking on the risk that the stock falls during the lock-up period for anyone else. Luna: So the discount is compensation for immediate liquidity. Lucas: Exactly. Palantir's secondary didn't have a huge discount — maybe 3 percent below the eventual IPO price — but in other deals, the discount can be 10 to 15 percent. It depends on market conditions and the quality of the company. Luna: What about the signaling risk? If you sell a big chunk before the IPO, does the market interpret that as a lack of confidence? Lucas: It can, which is why founders typically sell a smaller percentage — maybe 10 to 20 percent of their holdings. The rationale is diversification, not exit. And if the CEO holds the rest through the lock-up, that signal is actually positive: you're taking some chips off the table but still have skin in the game. Luna: That's a delicate balance. You don't want to look like you're bailing, but you also don't want to be the founder who waited too long and watched the market turn. Lucas: Exactly. And that's where the secondary sale as a tool is really elegant. It lets the founder time their personal liquidity independently of the company's capital needs. The company still issues new shares in the IPO to raise growth capital, while the founder unlocks cash at a known price. Luna: So the company gets its primary raise, the founder gets liquidity, and the market gets a price anchor. That's a three-way win if it's executed well. Lucas: It is. And I think we'll see this become standard practice for any IPO over five hundred million dollars. The transparency it creates — knowing that a major institutional buyer has done due diligence and committed at a specific price — reduces the information asymmetry that plagues traditional IPOs. Luna: One thing I want to flag: not all secondaries are created equal. If the secondary is done by venture capital firms rather than the founders, the market reads it differently. VCs are expected to sell eventually — they have fund lives. A founder sale is more scrutinized. Lucas: Great point. The identity of the seller matters. In Palantir's case, the secondary was primarily from early employees and a few VC funds, not the CEO. Alex Karp didn't sell a share. That reinforced confidence. Luna: So the takeaway for a founder listening: if you're considering a secondary before your IPO, sell a modest piece, frame it as diversification, and make sure the CEO holds. That's the pattern that works. Lucas: And work with your underwriter to price it at a slight discount to where you think the IPO will land. Too big a discount and you leave money on the table. Too small and the anchor investors won't bite. The sweet spot seems to be 3 to 5 percent. Luna: It's a negotiation, not a formula. Lucas: Right. And the data from the last two years suggests that IPOs with a pre-priced secondary have less first-day volatility and tighter bid-ask spreads in the first month. That's exactly what institutional investors want: stability, not a lottery ticket. Luna: So the structured secondary is really about taking the guesswork out of the IPO price. It's a concrete mechanism that benefits everyone — founders, early investors, and new shareholders. Lucas: Exactly. And as more companies like Palantir demonstrate its effectiveness, I expect it will become the default for any serious IPO. The days of the wild price swings on day one — the so-called IPO pop — might be numbered.