Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Stock Lending to Monetize Locked-Up Shares
Transcript
- Lucas: So you've taken your company public, the confetti's still on the floor, and suddenly you're told your shares are locked up for six months. You're rich on paper but cash-poor in reality. What do you do? Today we're looking at a strategy that's been getting a lot of attention in the founder community: lending out those locked-up shares to generate income. Luna: Stock lending. It sounds like something only the big banks do, but founders are starting to get in on it. Lucas: Exactly. And it's a legitimate move, but it's not without its quirks. Let's start with the basics. When you lend out your shares, you're transferring them to a borrower — usually a hedge fund or a short seller — who pays you a fee for the privilege. You still own the shares, you get them back at the end of the loan, and in the meantime you collect that lending fee. Luna: And the fee can be juicy, especially for hot stocks that are hard to borrow. I saw Palantir's borrow rate was over ninety percent annualized at one point this year. That's insane. Lucas: Yeah, that's an extreme case, but it highlights the potential. For founders sitting on locked-up shares of a stock in high demand, the income can be substantial. And with the IPO window open again — we're seeing companies like NVIDIA and Palantir trade at nosebleed valuations — there's a lot of interest in this strategy. Luna: But wait, is it even legal? I thought founders couldn't touch their shares during the lockup. Lucas: That's the key nuance. Lockup agreements typically restrict selling, but they don't always restrict lending. The shares are still your property, and lending them isn't a sale. So it's a loophole that some founders are using — carefully, with legal counsel — to generate income while they wait. Luna: But isn't that against the spirit of the lockup? I mean, the lockup is there to prevent a flood of shares hitting the market right after the IPO. Lucas: It's a gray area, for sure. The SEC hasn't specifically banned it, but they're watching. And the risk is that if a founder lends out shares and the borrower sells them short, that can put downward pressure on the stock — which kind of defeats the purpose of the lockup. So it's a double-edged sword. Luna: And what about the tax implications? I'd imagine that lending fees are taxed as ordinary income, right? Lucas: Right. The fees are ordinary income, not capital gains. And there are also complexities around dividends — if the stock pays a dividend while the shares are on loan, you might receive a payment in lieu of the dividend, which is taxed differently. It's not something you want to DIY without a good tax advisor. Luna: So it's not a 'set it and forget it' strategy. Lucas: Not at all. And there's another risk: the borrower could fail to return the shares, or the collateral they post could drop in value. That's why lending programs typically require the borrower to post collateral — usually cash or Treasuries — that's marked to market daily. But even then, there's counterparty risk. Luna: Have any big-name founders actually done this? I feel like we'd have heard about it. Lucas: It's happening more quietly than you'd think. A lot of the major banks and prime brokers have dedicated desks for this. Just recently, I read about a founder of a mid-cap tech company who lent out about ten percent of his locked-up stake and was earning an annualized yield of around eight percent. Not life-changing, but meaningful — like getting paid to wait. Luna: That's a solid return in this environment, especially with Treasury yields where they are. Lucas: And that's the appeal — it turns a dead asset into something productive. But the founder I mentioned was careful to structure it so that the loan could be recalled at any time, so he could sell immediately if the lockup expired or if the stock moved in a way he liked. Luna: That flexibility is crucial. You don't want to be locked into a lending agreement when the stock is soaring and you want to sell. Lucas: Right. And that's where the negotiation comes in. Founders with the right leverage can structure the loan with recall provisions, caps on the loan amount, and even restrictions on who the borrower can be. It's not a one-size-fits-all product. Luna: And what about the PR angle? If word gets out that a founder is lending out shares, could that spook investors? Lucas: It could, if it's seen as a signal that the founder is trying to hedge or monetize early. But if it's disclosed properly and framed as a normal wealth management strategy, it shouldn't be a huge deal. The market already assumes founders have diversified — most of them are selling as soon as the lockup expires anyway. Luna: So this is really just another tool in the toolbox. But it's not for everyone. Lucas: Definitely not. If you're a founder who sees your company as your life's work and you're not going to sell anytime soon, the lending fees might not be worth the complexity. But if you're looking for early liquidity and you've already decided to sell at the first opportunity, lending can be a smart interim move. Luna: It's like the financial equivalent of renting out your house while you're still living in it. You get income, but you're still the owner. Lucas: That's a perfect analogy. And like renting a house, you need to know the local regulations. The SEC has been tightening rules around securities lending, and some exchanges have their own requirements. You need a good lawyer and a good tax person. Luna: Speaking of good people to have in your corner — we should mention that we're able to bring you these conversations without ads because of listeners who support the show on Buy Me a Coffee. If you find value in what we're doing, you can help keep it going at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. Every little bit helps us keep the lights on and the research budget intact. So thank you to anyone who's already contributed. Luna: But back to stock lending — there's another angle I want to dig into. What happens if the stock price drops while your shares are lent out? Does that affect the loan? Lucas: Good question. The loan is collateralized, so if the stock price drops, the borrower may need to post more collateral — that's a margin call on their end. But as the lender, your exposure is limited to the counterparty risk. If the borrower goes bankrupt, you could find yourself waiting to get your shares back. Luna: How likely is that? I imagine the big prime brokers are pretty safe. Lucas: For the most part, yes, but we saw during the GameStop saga a few years back that even large short sellers can face liquidity crunches. The safest route is to go through a major bank with a strong balance sheet and a robust securities lending desk. Luna: And what about the actual mechanics? How does a founder even get started with this? Lucas: Typically, you'd work with your company's transfer agent or your prime broker. They can facilitate the loan and handle the paperwork. The founder's legal team would need to review the lockup agreement to make sure lending isn't prohibited, and then negotiate the terms of the loan. Luna: It sounds like a lot of moving parts. But for a founder with a large stake, the potential upside is real. Lucas: Absolutely. Let's put some numbers on it. Say a founder holds two million shares of a stock trading at fifty dollars. That's a hundred million dollars of locked-up equity. If the borrow rate is five percent, that's five million dollars a year in lending fees. That's not nothing. Luna: Five million dollars just for sitting on shares you couldn't sell anyway. That's a powerful incentive. Lucas: And it's not just for founders. Early employees with significant stakes can use it too. The strategy is really about optimizing an illiquid asset. Luna: But what about the optics? I mean, if a founder is lending out shares, could that be seen as a negative signal about their confidence in the company? Lucas: That's the big question. Some investors might interpret it as 'the founder doesn't believe in the stock.' But in practice, most founders are already diversified — they've sold a portion of their stake in the IPO, and they have a secondary plan. Lending is just another way to generate income while they wait for the lockup to expire. Luna: So it's a rational move, not a red flag. Lucas: Exactly. And as this practice becomes more common, I think investors will get used to it. It's just one of many tools in the founder's liquidity toolkit. Luna: What about the regulatory angle? Do you see the SEC cracking down on this anytime soon? Lucas: It's possible. The SEC has been looking at securities lending more broadly, especially around transparency. But for now, as long as founders disclose the activity and follow the rules, it's a legitimate strategy. The key is to work with experienced counsel and not try to hide anything. Luna: So, bottom line: is stock lending worth it for the average founder? Lucas: It depends. If you have a large lockup, a stock that's in demand, and you're comfortable with the complexity, it can be a great way to generate income. But if you're not willing to deal with the legal and tax headaches, it might not be worth the effort. For many founders, the simplicity of just waiting out the lockup is more appealing. Luna: And that's a perfectly valid approach too. Sometimes the best move is to do nothing. Lucas: Right. But the fact that this option exists is another sign of how mature the startup ecosystem has become. Founders have more tools than ever to manage their liquidity, and that's a good thing. Luna: So, if you're a founder sitting on a lockup, it might be worth a conversation with your advisor. And if you're listening and you've used this strategy, we'd love to hear about it. Lucas: Absolutely. Until next time, keep building.