Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Aftermarket Share Purchases to Defend Their Stock
Transcript
- Lucas: So a founder's stock drops 25 percent in a week. What do they do? Most tweet about the long term. But a handful actually go out and buy their own shares on the open market. That's the move we're digging into today. Luna: You're talking about aftermarket share purchases, right? When founders put their own money where their mouth is. Lucas: Exactly. And it's rare, but it's powerful. Let me give you a concrete case. There's a creator-economy company, let's call it DesignArena, that went public last year. In late July, a major sell-side analyst downgraded them, citing slowing user growth. The stock dropped from about fifty dollars to thirty-seven fifty in five days. Luna: Ouch. That's brutal. And what did the founder do? Lucas: Well, within two days, the CEO bought two million dollars worth of shares on the open market. Not a structured plan, not a pre-announced buyback. Just straight into the market. And the stock stabilized around forty bucks within a week. Luna: So it worked. But why does that signal have teeth? I mean, any founder can buy a few shares. Lucas: Because it's a public disclosure, and it's expensive. If the stock keeps falling, you're losing money in real time. And unlike a structured buyback, there's no board approval, no press release. It's a raw signal. Investors see it as 'this person knows the business better than the analyst, and they're putting their own wealth on the line.' Luna: But doesn't that flash a signal of desperation? Like, 'I need to prop up the stock'? Lucas: That's the flip side. It can absolutely look defensive. The key is the context. If the company just missed earnings, buying shares might look like a founder trying to save their own bonus. But if the drop is driven by macro fear or a single downgrade, it can be read as confidence. In DesignArena's case, the analyst's main concern was user growth, but the founder had just released a new AI feature that wasn't in the analyst's model. So the buyback was a bet on that product. Luna: And that bet paid off, at least short-term. But what about the long-term? Doesn't it tie up the founder's cash that could go elsewhere? Lucas: That's the real cost. A founder's capital is almost always better deployed in the company. But after an IPO, the founder's wealth is already tied to the stock. Buying more just concentrates it further. That's a risk some are willing to take to protect their reputation and the company's credibility with investors. Luna: Right. And there's a specific window where this matters most - right after the lockup expires. Lucas: That's a great point. Lockup expiration is a classic moment for share overhang. If the stock is already sliding, a founder's purchase can absorb some of that selling pressure. There was a robotics company earlier this year - not going to name them - but after their lockup expired, the stock dropped eight percent in a day. The founder bought five million dollars worth over the next week. It didn't stop the decline entirely, but it slowed it down and sent a message to the secondary market. Luna: And that message is 'I'm not selling, and I think you shouldn't either.' Lucas: Exactly. And it can actually change the exit math for early investors. If a founder is buying, it signals that they believe the stock is undervalued, which can make venture funds holding shares think twice about dumping into the market. Luna: So it's a coordination tool as much as a financial one. Lucas: For sure. But it can backfire. If the stock keeps falling after the founder buys, they look either foolish or desperate. And if the SEC finds any hint of market manipulation - like buying to avoid a breach of debt covenants - you're in serious trouble. Luna: And that's why founders usually prefer structured buybacks through the company. But those are slower. Lucas: Right. A company buyback requires board approval, SEC filings, blackout periods. A founder's personal purchase can happen in minutes. That speed is what makes it powerful in a fast-moving market. Luna: I'm thinking about the broader market right now. Apple's down ten percent in five days. That's a lot, but no one's expecting Tim Cook to buy shares personally. Lucas: No, and that's the difference. Mega-cap founders rarely need to. The market trusts them. But for smaller, founder-led companies, a personal purchase can be the difference between a rout and a recovery. Luna: And it's not just tech. I read about a retail chain founder who did the same after a bad quarter. Stock had been hammered, and the founder bought a million dollars worth. It didn't turn things around, but it bought time. Lucas: Exactly. It's a tool, not a silver bullet. And that's why we're talking about it today. If you're a founder preparing for an exit - or you're already public - knowing how to use this tool is part of your liquidity toolkit. Luna: And speaking of tools, we should mention that we keep this podcast ad-free. That's a choice we make so we can have these kinds of conversations without interruption. If you find this useful, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep that choice going. Lucas: Yeah, and it genuinely helps. No pressure, but if you're getting value from these episodes, that link is there. Now, back to the aftermarket purchase. There's another angle I want to bring up - the tax implications. Luna: Oh, right. Buying shares at a lower price, then selling later at a higher price - that's capital gains, not ordinary income. Lucas: Exactly. But there's a catch. If the founder holds those shares for less than a year, any gain is taxed as short-term capital gains, which is basically ordinary income rates. So a founder who buys to defend the stock isn't necessarily doing it for a quick profit - they're thinking about the long-term signal. Luna: And if they hold for over a year, they qualify for long-term rates, which can be substantially lower. Lucas: Right. But the bigger risk is if the stock doesn't recover. Then the founder has a capital loss, which can offset other gains. But that's a cold comfort if you've lost your credibility. Luna: So it's not a decision to take lightly. It's a signal that should be used sparingly and with clear eyes. Lucas: Absolutely. And that's the takeaway for founders: aftermarket purchases are a high-visibility, high-stakes move. Use them when you have real information that the market is missing, and you're willing to put your own wealth behind that conviction. Luna: And for investors, it's a signal to watch, but not the only one. Lucas: Right. Look at the broader market. We've seen massive swings this week. Apple down ten percent, but other tech names like Microsoft and Amazon are up over twenty percent in five days. The market is processing a lot of noise. A founder's buy can cut through that noise. Luna: And in that noise, it's a reminder that some founders are thinking beyond the quarter. They're thinking about the next five years. Lucas: Exactly. And that's the kind of founder you want to back, whether you're investing or joining their team. Luna: So, any final thoughts on aftermarket purchases? Lucas: Just that it's a tool, not a strategy. Use it when the situation calls for it, but have a plan for what comes after. The market is watching. Luna: And that's a wrap for today. Thanks for listening.