Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / Why Founders Are Choosing Direct Listings Over IPOs
Transcript
- Lucas: So Palantir is up fifteen percent in the last five days, Rivian up eighteen percent — and neither of those companies went public through a traditional IPO. They both chose a direct listing. Luna: Right. And that's not just a footnote — it's becoming a genuine alternative for a certain kind of company. We've talked about this in passing before, but I think it's worth drilling into the mechanics. Lucas: Absolutely. Because when a company like Palantir — eighteen billion dollars in revenue, highly controversial, very loyal shareholder base — decides to skip the underwriting process entirely, it forces you to ask: what is the IPO actually providing? And is it worth the cost? Luna: And if you've been getting value out of these deep dives into how founders actually get liquidity, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if these conversations are useful for what you're building or running. Lucas: Yeah, it makes a real difference. So let's start with the basics. In a traditional IPO, you hire a syndicate of investment banks. They underwrite the offering — meaning they buy the shares from the company and then sell them to institutional investors at a set price. The company pays a fee, typically around three to seven percent of the total raise. Luna: And that fee can be tens of millions of dollars for a large deal. But the banks also control who gets access to the shares, and they set the initial price. Lucas: Right. And that price is often deliberately set low to ensure a first-day pop — which makes the institutions happy, but it leaves money on the table for the company and its existing shareholders. A direct listing flips that. The company lists its existing shares directly on an exchange, no new shares issued, no underwriter buying the block. The opening price is determined by supply and demand on the exchange. Luna: So no first-day pop — but also no discount. The company gets full market price from day one. Lucas: Exactly. Spotify was the first major company to do this back in 2018. At the time, a lot of people thought it was a one-off. But then Slack did it in 2019, Coinbase in 2021, Palantir and Asana in 2020. Now we're seeing it become a real option for late-stage startups that don't need to raise new capital. Luna: And that's the key qualification — you have to not need the cash. The IPO is traditionally a capital-raising event. A direct listing is purely a liquidity event. Existing shareholders — founders, employees, early investors — get to sell into the public market. Lucas: Precisely. So if you're a company like Palantir that was already cash-flow positive, or Rivian that had raised massive private rounds, you might ask: why pay a bank seven percent just to let your employees sell shares? You can do it yourself with an SEC filing and a listing on NASDAQ. Luna: But it's not risk-free. Without an underwriter, there's no one guaranteeing that the stock will trade at a certain price. If there's insufficient demand, the opening price could be very low, or the stock could be volatile. Lucas: That's the big trade-off. In an IPO, the lead underwriter acts as a stabilizer — they can buy shares to support the price in the first few days. In a direct listing, you're on your own. The SEC also requires a certain level of pre-listing trading to establish a reference price. That's been a hurdle for smaller companies. Luna: But the SEC has loosened the rules. In 2020, they allowed companies to raise capital through a direct listing as well — not just provide liquidity. That was a game-changer. Lucas: Right. So now you have a hybrid model: a primary direct listing where the company can issue new shares and raise money at the same time. That blurs the line between IPO and direct listing even further. Luna: And we've seen some recent examples of that? I know there have been a few tech companies exploring it. Lucas: Yeah, there's been a quiet uptick. I can't name names because some are still confidential, but several late-stage SaaS companies with strong recurring revenue are looking at this. They don't want the dilution from an IPO, and they don't want the bank fees. They'd rather let the market decide. Luna: So what does this mean for the founders listening? If you're building a company and thinking about exit options, when should you start planning for a direct listing versus an IPO? Lucas: Great question. First, you need a very clean cap table. If you have lots of complex preferred stock terms, you'll need to convert everything to common stock before listing. That takes time and legal work. Second, you need a shareholder base that's comfortable with price discovery — meaning your early investors aren't going to panic if the stock drops five percent on day one. Luna: And third, you probably want a business that's already well-known in the market. Palantir had years of brand recognition. Spotify had millions of users. If you're a B2B company nobody has heard of, you might need the marketing and institutional relationships that an underwriter brings. Lucas: Exactly. The IPO roadshow is essentially a marketing tour. The underwriter sets up meetings with big institutional investors — Fidelity, T. Rowe Price, BlackRock — and the CEO pitches the story. That generates demand. In a direct listing, you don't have that orchestrated demand creation. You're relying on existing awareness and retail investor interest. Luna: And the data backs that up. A study from 2023 showed that direct listings had higher volatility in the first month compared to IPOs, but the long-term performance was actually quite similar, once you adjust for the first-day pop. Lucas: So the narrative that direct listings are riskier for the company might be overstated. The big question is really about control. Do you want to control the price and the investor base, or are you willing to let the market decide? For a lot of founders who've spent years building, the idea of letting a bank dictate the price on the day is frustrating. Luna: And for employees, it might mean a faster path to liquidity. In an IPO, there's usually a lockup period — 90 to 180 days — during which employees can't sell. In a direct listing, there's often no lockup, or a much shorter one. That's a huge deal for retention and morale. Lucas: Palantir actually had a unique structure where they allowed employees to sell immediately, but they also had a secondary offering alongside. That gave early investors an exit while employees could cash out some shares. It was messy but it worked. Luna: So if I'm a founder at a Series B company, what should I be doing now to keep the direct listing option open? Lucas: First, keep your cap table clean. Avoid overly complicated preferred stock structures. Second, build a relationship with a transfer agent and a listing exchange early. Third, get your financial reporting up to public-company standards well in advance. The SEC requires audited financials for three years. If you're not already doing that, start now. Luna: And maybe think about building a strong retail investor following. Companies like Palantir and Coinbase had huge retail interest even before listing. That helps with demand. Lucas: Right. And that's something we're seeing more of — companies using social media and direct communication to build a shareholder base. It's a different world from the old model where the bank's sales force was the only channel. Luna: All right, so let's zoom out a bit. We've got Palantir up fifteen percent, Rivian up eighteen percent in the last week. These are direct listing companies. Do you think that performance is a signal that the market is rewarding the direct listing structure? Lucas: Partially. But it's also just good earnings or news for those specific companies. Rivian had a production update that beat expectations. Palantir announced a new government contract. The direct listing itself isn't the driver — it's the underlying business. But it's notable that these companies have been able to execute well without the traditional IPO machinery. Luna: So the machinery might be becoming optional. And for a generation of founders who grew up reading about Spotify and Coinbase, direct listing is now a credible path, not a quirky alternative. Lucas: Exactly. And as more companies succeed with it, the stigma fades. We're likely to see more late-stage unicorns choose this route, especially if they're well-capitalized and have strong brand recognition. The IPO won't disappear, but it'll share the stage. Luna: And for our listeners who are founders or investors, the takeaway is: don't default to the IPO just because that's how it's always been done. Evaluate the trade-offs. Direct listing might be the better fit. Lucas: Absolutely. And we'll keep watching the data. If you've got questions or know a company considering this route, drop us a line — we might do a follow-up. For now, thanks for listening.