Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use SPACs as a Liquidity Shortcut
Transcript
- Lucas: So you've got a startup that's generating real revenue — maybe fifty million in annual recurring revenue — and you want to take it public. But you don't want to spend nine months on a roadshow, deal with IPO pricing uncertainty, or leave your lockup proceeds to the whims of the aftermarket. That's where a SPAC comes in. Luna: And we've seen that story before — 2020, 2021, hundreds of SPACs, some great outcomes, a lot of disasters. But the structure itself didn't die. It evolved. Lucas: Exactly. And there's a reason we're talking about it today. This week, a battery-recycling company called Redux Materials — I'm using a composite example, but it's based on real filings — announced a de spac merger valuing the company at two point four billion dollars. The founders are rolling ninety percent of their equity. They're taking about two hundred million in cash off the table through a combination of the PIPE and a simultaneous secondary sale. Luna: So the SPAC is effectively their liquidity event, even though the stock doesn't start trading for another four months. That's the appeal — certainty of exit. Lucas: Right. In a traditional IPO, you file your S-1, you go on roadshow, you price the night before, and then you hope the market doesn't tank between pricing and the first trade. With a SPAC, you negotiate the valuation upfront, you get a PIPE commitment from institutional investors, and you know exactly how much cash is coming in — assuming the SPAC's public shareholders don't redeem en masse. Luna: And that redemption risk is the big if. In 2021, we saw redemption rates of seventy, eighty, even ninety percent on some deals. The PIPE was supposed to backstop that, but if the PIPE wasn't fully committed, the deal fell apart. Lucas: Which is why the structure has gotten more conservative. Post-2022, you see SPACs with larger trust sizes — five hundred million or more — and PIPEs that are fully committed, often with a minimum cash condition. In the Redux deal, the PIPE is four hundred million, and the SPAC's trust has about three hundred million. Even if eighty percent of the public shareholders redeem, they still have enough to close. Luna: So the founder's liquidity isn't dependent on retail investors holding the SPAC shares. That's a big shift from the early SPAC days, where the sponsor promote was the only real incentive. Lucas: Speaking of the sponsor promote — that's another area that's evolved. In 2020, sponsors were taking twenty percent of the equity for putting up basically nothing. Now you see promotes closer to ten or fifteen percent, and often with performance vesting. The SEC's 2024 guidance on forward-looking statements also changed the game — SPACs can no longer rely on the safe harbor for projections the way they used to. That means the financial forecasts in the investor presentation have to be much more grounded. Luna: Which actually benefits founders who have real numbers. If you're a climate-tech company with signed contracts and a clear path to profitability, you're in a stronger position than the 2021 SPACs that were projecting billions in revenue off of pilot programs. Lucas: And the market is reflecting that discipline. Look at the broader tape today — META up over eight percent in the last five days, which suggests investors are rewarding companies with clear monetization. Meanwhile, COIN is down over four percent. That's a crypto exchange that went public via direct listing, not a SPAC, but the volatility there shows the market's impatience with uncertainty. Luna: So when a founder is sitting on a company that's profitable but not yet big enough for a traditional IPO, SPACs offer a faster path to liquidity. But the lockup period is still a factor — typically six months, though some deals allow for early release if the stock trades above a certain level. Lucas: Which is where warrants come in. Founders often negotiate warrant coverage as part of the PIPE — basically, the right to buy more shares at a fixed price later. It's a way to compensate investors for taking the risk of a de spac, but it also dilutes the founder if the stock rallies. You have to model that carefully. Luna: And the warrant accounting is a nightmare under GAAP. Some SPACs have had to restate financials because they misclassified warrants as equity instead of liabilities. That's not a founder problem per se, but it can delay the merger and tie up the sponsor's time. Lucas: Worth noting that the SPAC route isn't for every founder. If your company is in a hot sector and you have a strong institutional following, a traditional IPO might still get you a better valuation and a more stable shareholder base. But if you want speed and certainty — and you're willing to accept the dilution from the sponsor promote and the warrants — a SPAC can be the right tool. Luna: And we should mention the reverse-merger dynamic. In a SPAC, the founder's company is technically the acquirer, even though the SPAC is the listed entity. That means the founder's existing shareholders have to approve the deal, and they get a vote. It's not a one-sided negotiation. Lucas: Right. And the proxy statement has to disclose all the terms — the sponsor promote, the warrant coverage, the PIPE pricing, the redemption projections. It's a lot of transparency, which is actually healthy. The 2020-era SPACs got a bad reputation because investors didn't understand what they were buying. Luna: If these conversations are useful for what you're building or running, listener support is what keeps this show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Lucas: And it genuinely helps us keep digging into these structures. So, back to the SPAC path — one question we haven't answered is whether the lockup period actually protects the founder or just delays their liquidity. Luna: I think it depends on the stock performance. If the stock trades above the SPAC price, the founder's locked-up shares are worth more at unlock. But if it trades below, they're stuck with losses they couldn't sell. That's the real risk. Lucas: And that's why some founders negotiate for a partial early release — say, twenty percent after ninety days if the stock is above a certain threshold. It gives them some flexibility without fully exposing the market to a flood of shares. Luna: We've also seen founders use structured liquidity ladders within the lockup — similar to what we covered in episode ninety-three, but applied to the SPAC context. Lucas: Exactly. The SPAC structure is modular. You can add earnout provisions, performance-based vesting, secondary sale allowances. The key is to align the founder's exit with the long-term health of the public company. Luna: And that alignment is what the market is rewarding now. The days of the blank-check frenzy are over. But the SPAC itself — as a tool for founder liquidity — is here to stay, just in a more disciplined form. Lucas: Yeah, and I think that's the right note to end on. The structure has matured. The founders who use it well are the ones who treat it as a strategic choice, not a shortcut.