Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Secondaries Before an IPO
Transcript
- Lucas: You know, this week I've been watching Palantir — ticker P-L-T-R — up about 6% over the last five days, trading around $134. And it got me thinking about a question that comes up a lot in our listener mail: how do founders actually get cash out before an IPO without spooking investors? Luna: Right, because if you're sitting on millions of shares, selling even a small chunk before the IPO can signal to the market that you don't believe in the long-term story. Lucas: Exactly. And that's where structured secondary sales come in. The idea is basically a private transaction — usually with a handful of institutional investors — where the founder sells a portion of their shares before the company goes public. The key word is 'structured' — it's not just dumping shares on the open market. Luna: So how does that work in practice? I know Airbnb did something like that before their 2020 IPO. Lucas: Yeah, Airbnb is a great example. In 2020, they did a pre ipo secondary that allowed early employees and some founders to sell shares at a price that was effectively a discount to what the IPO priced at. The buyers were big names like Sequoia and Silver Lake. The structure is usually a block trade — the company facilitates the sale, but it's not the company issuing new shares. Luna: And that's the distinction, right? It's not dilutive. The company doesn't raise money — the founder gets liquidity. Lucas: Exactly. The float stays the same. And from the buyer's perspective, they get a discount to the IPO price plus a lockup agreement that keeps them from selling for 90 or 180 days after the listing. It's a win-win if the stock performs. Luna: But what if the stock tanks? I mean, we've seen plenty of IPOs where the price drops after listing. The buyer is stuck with shares they paid for at a premium to what they're worth. Lucas: That's the risk. So buyers do a ton of diligence. They look at the company's fundamentals, the market reception, the lockup terms. And they usually negotiate a so-called 'price protection' clause — if the IPO prices below a certain level, the transaction gets adjusted or cancelled. Luna: So it's not a guaranteed exit for the founder. Lucas: No, it's contingent. And that's actually part of what makes it credible to the market. If a sophisticated investor like Coatue is willing to buy pre ipo shares at a structure, it's a signal that they've done the homework and believe in the company. Luna: It's interesting you mention Palantir because they actually had a unique path — direct listing, not a traditional IPO. Did they do secondaries too? Lucas: They did. Before their direct listing in 2020, Palantir allowed employees to sell shares in a pre-listing secondary. The price was around $7.50, and the stock opened at $10 on the first day. So those early sellers left some money on the table, but they got liquidity. Luna: And now it's at $134. So they might regret selling early, but that's the trade-off — cash now versus potential upside later. Lucas: Right. And that's the founder's calculus. If you've got 80% of your net worth tied up in a single company, selling even 10% at a reasonable price can change your life. Plus, it diversifies your risk. Luna: Speaking of changing lives — and this is a little off-topic but related — if you find these conversations useful for what you're building or running, listener support is what keeps the show ad-free and independent. You can help at buy me a coffee dot com slash fexingo. Lucas: Yeah, honestly, it makes a difference. We don't run sponsors, so it's just you all. Anyway — back to secondaries. One thing I think is underappreciated is how these transactions are priced. Luna: Yeah, I've heard there's a standard discount. What's typical? Lucas: Usually 15 to 25 percent below the expected IPO price. The exact number depends on how hot the IPO is, how much the buyer wants in, and the lockup period. For a company like Airbnb, which was very hot, the discount was on the lower end. Luna: So the hotter the IPO, the less discount the buyer demands. Lucas: Exactly. And right now, with the market pretty choppy — the NASDAQ is down a bit this week, Palantir up, Tesla down 4% — the discounts might be widening. If you're a founder thinking about a pre ipo secondary, you want to do it when the market is strong. Luna: But you also don't want to wait too long. If the IPO gets delayed or the market turns, that secondary window can close. Lucas: Right. And that's why we're seeing more structured secondaries happening earlier — sometimes 12 to 18 months before the planned IPO. It used to be a last-minute thing, but now it's part of the planning. Luna: Let's talk about the legal structure. I assume there's a lot of paperwork. Lucas: There is. The key document is the secondary purchase agreement. It spells out the number of shares, the price, the lockup, and any so-called 'most favored nation' clauses — meaning if the company later sells shares at a lower price, the buyer gets the same discount. Luna: And the founder has to disclose the sale to the SEC if it's above a certain size, right? Lucas: Yeah, if the founder is an officer or director, they file a Form 4. And the company might have to disclose it in the S-1 or the registration statement. So it's not secret — the market sees it. But because it's structured, it's not seen as a panic sell. Luna: I want to bring up the Uber-Delivery Hero deal that's been in the news. That's a different kind of exit — not a pre ipo secondary, but an M&A exit. How does that compare? Lucas: Good question. Uber just sold its stake in Delivery Hero, which is a secondary sale of a different kind — it's a public company secondary. But for founders, the same principle applies: if you have a large block of shares, you want to sell in a way that doesn't crater the stock. Luna: And Uber did that through a block trade, right? I saw the headlines. Lucas: Yeah, they sold around $1.2 billion worth of shares in a single block. The stock barely moved, which is impressive. That's the power of a structured secondary — you find a buyer or a group of buyers who take the whole block at a negotiated price. Luna: So for founders, whether it's before an IPO or after, the playbook is similar: find the right counterparty, negotiate the discount, and manage the narrative. Lucas: Exactly. And the narrative piece is huge. If you're a founder selling 5% of your stake before an IPO, you want to frame it as 'I'm diversifying after 10 years of building,' not 'I'm getting out while I can.' The structure helps with that. Luna: But there's also the tax angle. If you sell pre ipo, you're paying capital gains at the current rate. If you wait until after the IPO, you might get a lower rate if you're in a different bracket. Lucas: Right, and that's a whole other episode. We covered tax deferral in episode 108. But the short version is: if you can, you want to sell in a year when your income is lower, or use a structured installment sale to spread the gain. Luna: So what's the one takeaway for a founder listening today who's thinking about a pre ipo secondary? Lucas: I'd say: start the process early. Build relationships with potential buyers — the big crossover funds, the sovereign wealth funds, the family offices. And don't wait until the IPO is imminent. The best secondaries happen when there's no pressure. Luna: And have a clear plan for what you'll do with the liquidity. Lucas: Yeah. Because the moment you have $10 million in the bank, the questions change. It's not about survival anymore — it's about what you want to build next. Luna: That's a good note to end on. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.