Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Pre-IPO Loans Against Their Shares
Transcript
- Lucas: You've raised venture capital, you've built for seven years, you're six months from an IPO — and you're sitting on paper worth maybe fifty million dollars. But you can't spend it. Your house is still mortgaged, your kids' tuition is due, and every dollar of your net worth is tied up in a single stock that hasn't traded yet. What do you do? Luna: You borrow against it. That's what more and more founders are doing — taking out loans secured by their own pre ipo shares. Lucas: Exactly. Welcome back to The Startup Exit Podcast — I'm Lucas. Luna: And I'm Luna. Today we're looking at pre ipo share loans — the mechanics, the risks, and why they're suddenly everywhere. Lucas: The backdrop is pretty clear. We're sitting here on June 19, 2026, and the IPO pipeline is stacked. OpenAI is reportedly gearing up for its public debut. Baseten, the AI inference startup, just raised a one-point-five-billion-dollar round — and that kind of late-stage funding often comes with expectations of a near-term exit. When you've got companies valued at tens of billions, the founders sitting on billions in paper wealth, the natural question is: how do they cash out without triggering a fire sale? Luna: And the answer increasingly is: they don't sell. They borrow. Lucas: Right. So let's get specific. A pre ipo share loan is essentially a margin loan, but the collateral isn't a publicly traded stock — it's private company stock that has no liquid market. Banks like JPMorgan, Goldman Sachs, and Morgan Stanley have dedicated groups that underwrite these loans. They assess the company's valuation, the liquidation preference of the shares, the likelihood of an IPO within a certain timeframe, and then they lend against a percentage of that — typically thirty to fifty percent of the most recent 409A valuation. Luna: So if the 409A says your common stock is worth twenty dollars a share, the bank might lend you six to ten dollars a share. Lucas: Exactly. And the interest rates are not cheap. We're talking SOFR plus three to five hundred basis points, depending on the risk profile. So on a ten million dollar loan, you might be paying seven to nine percent annually. But for a founder who needs liquidity to diversify, buy a home, or fund a new venture, that cost can be acceptable — especially if they believe their stock will appreciate significantly post ipo. Luna: And there's a tax advantage too, right? Borrowing isn't a taxable event. Selling shares would trigger capital gains. Lucas: Huge advantage. If you sell shares in a secondary transaction before the IPO, you pay long-term capital gains — twenty percent federal, plus state — and you lose the upside. With a loan, you keep the shares, you defer the tax, and if the stock goes up, you benefit. The loan just sits there accruing interest. Luna: But what happens if the company's valuation drops — or the IPO doesn't happen? Lucas: That's the risk. These loans are typically structured with a loan to value ratio, and if the value of the collateral falls — because a down round happens, or the IPO is delayed — the bank can issue a margin call. The founder has to either put up more collateral or pay down the loan. If they can't, the bank can force-sell the shares. In a private company, that's not easy — there's no stock exchange to execute a trade. So the bank might have to find a buyer in the secondary market, likely at a discount. Luna: That's the nightmare scenario: you lose control of when and how you sell. Lucas: Right. And it happened to a few founders during the 2022 correction. Companies that had raised at high valuations in 2021 saw their 409A values cut in half. Founders who had taken out loans against those higher valuations got margin calls. Some had to scramble to bring in cash. Luna: So how do founders protect themselves? Are there structural protections built into these loans? Lucas: The smarter ones negotiate a 'cure period' — typically thirty to sixty days — before a margin call can be enforced. They also try to get a non-recourse clause, meaning if the loan goes bad, the bank can only take the shares, not go after the founder's personal assets. But that's rare. Most banks want recourse, especially for larger loans. Luna: And the loan agreements often have covenants around the IPO timeline, right? Lucas: Yes. The bank might require that the company files for an IPO within eighteen months, or the interest rate steps up, or the loan becomes due. So the founder's personal liquidity is tied to the company's exit timeline. That creates an interesting alignment — or pressure, depending on how you look at it. Luna: It's almost like the loan forces the founder to push for an IPO, whether or not it's the right strategic move. Lucas: Exactly. And that's why some investors are wary of founders taking these loans — they worry it creates a misaligned incentive. But for the founder, it's a tool. Let's talk about a real example. Take a founder at a company like Baseten. They just raised a one-point-five-billion-dollar round. Let's say the founder owns five percent. At a valuation of, say, ten billion, that's five hundred million in paper. A bank might lend thirty percent — one hundred fifty million. That's real money. Luna: That's enough to set up a family office, diversify into real estate, fund a new startup — all while keeping the equity. Lucas: Right. And if the company IPOs at a higher valuation, the founder wins twice: the loan is still outstanding, but the collateral is worth more, and the shares are now liquid — so they can eventually sell to repay the loan. Luna: There's also the question of disclosure. Do these loans have to be disclosed to the SEC or to the board? Lucas: Typically, the board needs to approve any loan secured by company shares, because it could affect the founder's ability to hold the stock through the lockup period. And post ipo, if the loan is still outstanding, it might have to be disclosed in the prospectus or in insider transaction filings. But the terms are often opaque. The bank and the founder sign a confidential agreement. Luna: It feels like this is becoming a more standard part of the exit toolkit. Five years ago, it was mostly done quietly by a few unicorn founders. Now it's almost expected. Lucas: Absolutely. And one reason is that the secondary market has grown, but it's still inefficient. If you need liquidity now, selling in a secondary transaction can take months and you might have to accept a discount. A loan can close in weeks. So for many founders, the loan is the faster, cheaper option — at least in the short term. Lucas: That said, I want to pause here for a moment because this is the kind of conversation we deliberately keep free of ads. No sponsors, no interruptions. If you find these episodes useful for what you're building or running, and you want to support that choice, the link is buy me a coffee dot com slash fexingo. That's it. Keeps the podcast independent and focused. Luna: Yeah, we really believe in that. And your support directly helps us keep digging into these niche topics that don't get covered elsewhere. Lucas: Alright — back to the mechanics. One thing we haven't talked about is how the loan interacts with the lockup period. Most IPOs have a lockup of 180 days where insiders can't sell. If you have a loan that comes due during the lockup, you could be in trouble. So smart founders negotiate loan maturities that extend well past the lockup expiration. Luna: And they also need to think about the interest payments. If the loan is interest-only, they need to have cash from somewhere to make those payments — or the interest capitalizes, which means the loan grows. Lucas: Right. Cash-flow interest is common. Some loans allow payment-in-kind, where the interest is added to the principal. That can be dangerous if the stock doesn't appreciate enough to cover the growing loan balance. Luna: Let's talk about the current environment. With interest rates where they are — the ten-year Treasury around four percent — these loans are expensive. But founders are still taking them. Lucas: Because the alternative is selling at a discount. And with the IPO window open — look at the market today, with stocks like NVIDIA at two hundred ten, Meta at five seventy-seven — the appetite for new issues is strong. Founders want to hold their shares through the IPO pop, not sell before it. Luna: So it's a bet on continued market strength. Lucas: It is. And that's the risk. If the market turns, those loans become anchors. But for now, it's a rational choice for many founders. The key is to structure it right — understand the loan to value, the covenants, the margin call triggers, and have a plan B. Luna: What about the banks? Are they eager to do these loans? Lucas: Very. It's a lucrative business. They charge origination fees, interest, and they get a relationship with a future public company. JPMorgan and Goldman have been especially aggressive. They see it as a way to win the IPO underwriting mandate. If you lend the founder fifty million, you're in a strong position to be the lead banker on the IPO. Luna: So it's a loss leader in a way — the loan itself might be profitable, but the real prize is the IPO fees. Lucas: Exactly. And that's why founders have some negotiating leverage. They can shop the loan around and get competitive terms. Luna: One last thought — is this available to all founders, or only those at the biggest companies? Lucas: It's mostly for companies valued at over a billion. The due diligence is expensive, so the loan size needs to be at least five to ten million to make sense for the bank. But there are smaller boutique lenders that will do loans for earlier-stage companies, at higher rates. Luna: So the trend is filtering down. Good to know. Lucas: It is. And I think we'll see this become even more standardized. As more founders look for liquidity before exits, the pre ipo loan will be a standard tool — alongside secondary sales, tender offers, and direct listings. Luna: Next episode, we'll look at how the OpenAI IPO might change the landscape for these loans — because the scale is so massive. Lucas: That's a great preview. For now, thanks for listening. I'm Lucas. Luna: And I'm Luna. See you next time.