Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Directed Share Programs in IPOs
Transcript
- Lucas: So, Rivian's stock dropped over six percent in the last five days, and I couldn't help but think about their IPO back in 2021 — one of the most anticipated listings of that year, and they did something a lot of founders overlook: a directed share program. Luna: Directed share programs — I feel like we hear about them in passing, but they're never the headline. What exactly are they? Lucas: Right, so a directed share program, or DSP, is when a company sets aside a portion of IPO shares — usually one to five percent — to allocate to specific groups outside the traditional institutional investors. Think customers, employees, maybe even community members. The company gets to direct those shares to people who have a real stake in the business. Luna: So it's not just about raising money — it's about who gets to own the company from day one. Lucas: Exactly. And it's a way to reward loyalty and build a longer-term shareholder base. Instead of dumping everything on hedge funds, you're putting shares in the hands of people who might actually hold them because they believe in the mission. Luna: I remember Rivian's IPO — they set aside shares for their reservation holders, right? People who had pre-ordered trucks. Lucas: That's the classic example. Rivian allocated a portion of their IPO to customers who had put down deposits on their electric trucks. It turned a transaction into a relationship — those customers became shareholders, and that generated a ton of goodwill. Luna: And it's not just Rivian — I've seen a bunch of tech companies do this. But how common is it really? Lucas: It's becoming more standard. A few years ago it was rare. Now, a meaningful chunk of consumer-facing IPOs will include a DSP. The data shows it helps with marketing, and it can actually stabilize the stock a bit because those directed shareholders tend to hold longer. Luna: That's interesting because one of the fears with IPOs is that everyone's going to flip on day one. Does a DSP actually prevent that? Lucas: It doesn't prevent it, but it tilts the odds. When you allocate to customers, they're typically not day traders. They're people who use the product. They're more likely to hold for the long term. That said, you do get flippers — there's always someone looking to make a quick buck. Luna: So what are the mechanics? How does a founder actually set one up? I imagine it's not as simple as just picking names out of a hat. Lucas: No, it's more structured than that. The company works with the underwriters to reserve a percentage of the offering. Then they have to define the eligibility criteria — who qualifies? Is it customers who spent over a certain amount? Employees at a certain level? The SEC has rules around it, and you have to be careful about fairness and disclosure. Luna: Right, because you can't just hand shares to your friends and family and call it a customer program. There's a line. Lucas: Exactly. The SEC watches for preferential treatment. If you're allocating to insiders or people with a personal connection, that's a red flag. The program needs to be based on objective criteria. That's one of the biggest pitfalls. Luna: What about the employee side? I know a lot of tech companies let employees buy shares at the IPO price. That's a type of DSP, isn't it? Lucas: It's a variation. Some companies do a broad-based employee participation program, where employees can buy up to a certain amount at the IPO price. That's a great morale booster and gives early staff a chance to share in the upside they helped create. But it does add administrative complexity. Luna: And what about the customers — there's a real-world example from the last year or two that I'm thinking of. Did any recent IPO use a DSP in a way that moved the needle? Lucas: Well, you had Airbnb back in 2020, which did a directed share program for hosts. That was a big one. Since then, I've seen more consumer apps and even some fintech companies do it. But honestly, the most notable recent one might be in the AI space — but I don't want to name a specific company unless I'm sure about the details. Luna: That's fair. Let's talk about the downsides. There's the SEC risk, but what else should a founder worry about? Lucas: One big one is the mechanics of getting those shares into the right hands. If you're allocating to thousands of customers, you need a clear process for them to open brokerage accounts and complete the purchase. That's a logistics headache. And if something goes wrong, it can become a PR problem, not just an operational one. Luna: And there's the optics. If the stock pops, those customers are happy. But if it drops — and we've seen plenty of IPOs drop — you could have angry shareholders who used to be your biggest fans. Lucas: That's a real risk. You're essentially giving them a financial stake in something that might lose value in the short term. A lot of retail investors who get IPO shares through a DSP aren't sophisticated. They might not understand the volatility. So there's a responsibility to communicate the risks clearly, and not just in the fine print. Luna: So when does a DSP make sense? Is it only for consumer-facing companies, or could a B2B startup use it too? Lucas: I think any company with a strong community or a dedicated user base can benefit. B2B companies might allocate to their biggest enterprise customers or strategic partners. The key is that the people you're allocating to genuinely care about the company's success. If they're just looking for a discount, it's probably not the right fit. Luna: What about the size of the allocation? Is there a standard percentage that works best? Lucas: Typically it's one to five percent of the offering. Less than one percent and it's not worth the effort. More than five percent and you're reducing the institutional allocation, which could hurt your pricing. It's a balancing act. Luna: And there's also the question of whether it actually helps the company beyond the IPO window. Does it have a lasting impact on the shareholder base? Lucas: That's a great question. Some studies suggest that directed shareholders tend to hold for at least a year, and they're more likely to participate in future offerings or buy on the secondary market. That can reduce volatility and support the stock price over time. But it's not guaranteed. Lucas: And there's a bigger strategic angle here. A DSP can turn your most passionate customers into brand ambassadors who have a literal stake in your success. That's a powerful narrative, and it resonates with investors too. It shows that your company has a community, not just customers. Luna: It's interesting that you mention community, because a lot of the recent IPO hype has been around AI companies that might not have a traditional consumer base. Do you think DSPs will become more creative in how they define who gets shares? Lucas: I think so. We're already seeing companies allocate to power users, open-source contributors, even beta testers. The definition of 'community' is expanding. As long as the criteria are clear and defensible, founders have a lot of room to get creative. Luna: So if I'm a founder listening and thinking about an IPO, what's the one piece of advice you'd give about DSPs? Lucas: Start early. Don't make it an afterthought. You need to work with your legal team and underwriters months in advance to design the program, define the criteria, and communicate it clearly. A well-executed DSP can be a huge asset. A rushed one can be a liability. Luna: That's really helpful. And speaking of assets, if you're finding these exit strategies useful, you might want to support the show. We keep it ad-free, and listener support is what makes that possible. If you're able, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that keeps these conversations going. Lucas: Yeah, we appreciate that. It genuinely helps. But back to directed share programs — there's another angle we haven't touched on: the impact on the aftermarket. We mentioned stability, but there's also the psychological effect on the first day of trading. Luna: Right, because if a big chunk of shares are held by long-term-oriented holders, that sends a signal to the market. Lucas: Exactly. When the lead underwriters see that the IPO is supported by a loyal base, they're more confident in the pricing. And on the opening day, if there's less selling pressure from flippers, the stock can stabilize more quickly. That benefits everyone. Luna: So it's not just a nice to have. It can actually affect the outcome of the IPO itself. Lucas: Definitely. And with the market we're seeing now — the S&P's been volatile, and a lot of tech names are down over the past week — founders need every advantage they can get. A DSP might be one of the most underappreciated tools in the book. Luna: It seems like something we'll see more of. I'm curious to see which companies in the next wave of IPOs lean into it. Lucas: Me too. And I think the next few quarters will be telling. There's a lot of pent-up demand for exits, and if DSPs prove to create more durable shareholder bases, they might just become the default. Luna: That's a great note to end on. Thanks for breaking this down, Lucas. Lucas: Anytime. For our listeners, if this sparked something, go back and look at the IPO filings of companies you admire. You'll probably see a DSP tucked in there. It's a small detail that says a lot about how they think about ownership.