Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Collar Agreements Protect Founders in Stock M&A Deals
Transcript
- Lucas: So we've talked a lot on this show about how founders get paid in an exit—cash, stock, earnouts, rollover equity. But there's one tool that comes up whenever the acquirer is paying in its own shares and the founder wants to lock in the value: a collar agreement. Luna: A collar—like the options strategy where you buy a put and sell a call? Lucas: Exactly the same mechanics. You set a floor price and a ceiling price on the stock you're about to receive. If the stock stays inside that band, you get the agreed number of shares. If it falls below the floor, the acquirer makes you whole—usually by issuing extra shares. If it surges above the ceiling, you give up some upside. The goal is certainty during the time between signing and closing. Luna: And that's especially relevant right now. Microsoft is up nearly twenty percent in the last five days. Meta dropped ten percent. NVIDIA down six percent. Volatility is real. Lucas: Right. And honestly, if these conversations are useful for what you're building or running, a coffee at buy me a coffee dot com slash fexingo keeps the show ad-free. We appreciate that. Luna: Yeah, it makes a difference. So back to collars—how is the range typically set? Lucas: Usually it's a symmetrical band, like ten or fifteen percent on either side of the signing price. So if the stock trades at one hundred dollars at signing, the floor might be ninety and the ceiling one-ten. The negotiation is about how wide that band is and who bears which risk. Luna: Who typically asks for a collar? Lucas: The founder, almost always. If the acquirer's stock is volatile—say a high-beta tech name—the founder wants downside protection. But the acquirer might resist because a collar effectively caps their cost. If the stock goes up, the acquirer would have to issue fewer shares, so they lose the benefit of their own stock price increase. Luna: So it's a balancing act. What are some real numbers you've seen in practice? Lucas: In a deal I know of from last year, an AI startup was acquired by a large enterprise software company. The acquirer's stock was trading at two hundred and twenty. They set a floor at two hundred and a ceiling at two forty. The deal closed in three months. During that period, the stock dropped to two-oh-five—still above the floor, so no adjustment. But if it had dipped to one ninety-five, the founder would have received additional shares to make up the difference. Luna: So the founder got the economic equivalent of two hundred dollars per share regardless. Lucas: Exactly. The collar converts the variable number of shares into a fixed value. There's also a variation called a 'fixed collar' where you agree on a fixed number of shares and the acquirer adjusts the exchange ratio. That's more common when the stock is very volatile. Luna: What about when the stock crashes? Like if it drops thirty percent? Lucas: That's the hardest scenario. In most collars, the floor is set somewhere around the current price. If the stock crashes through the floor, the acquirer has to issue a lot of extra shares. That can dilute existing shareholders, and the acquirer might try to renegotiate the entire deal. Some collars have a 'walkaway' clause if the price falls below a certain point. But that's rare. Luna: I've heard that collars are also used when the deal is paid in a mix of cash and stock. How does that work? Lucas: You can collar just the stock portion, or the whole consideration. Often the collar only applies to the stock component. Cash is cash, no volatility. But if the stock is a significant chunk—say fifty percent of the deal value—the collar becomes critical. Founders should model the value of the consideration under different stock price scenarios before signing. Luna: And what about taxes? Does the collar affect the tax treatment? Lucas: Great question. In a tax-free reorganization, the exchange of shares is generally tax-free. But if the collar results in the founder receiving cash instead of shares, it can trigger taxes. Most collar structures are designed to stay within the tax-free guidelines. The IRS has rules about contingent rights. You definitely want a good tax advisor. Luna: So, if you're a founder facing a stock offer, what's your one piece of advice? Lucas: Ask for a collar if the acquirer's stock is volatile. It's not a standard deal term, but it's not rare either. Have your banker or lawyer bring it up early in the negotiation. And test the floor and ceiling against historical volatility. If the stock regularly swings fifteen percent in a quarter, you want a wider band. Luna: And if the acquirer pushes back? Lucas: You can trade something else. Maybe a narrower band in exchange for a higher overall price. Or you accept a lower floor in exchange for a higher ceiling. It's all part of the negotiation. The key is to understand the convexity—what happens to your wealth under extreme scenarios. Luna: Interesting. So collars are really about protecting against tail risk. Lucas: Exactly. And in a market where we've seen Microsoft jump twenty percent in a week and Meta drop ten percent, that tail risk is real. Founders who ignore it are leaving a lot to chance. Luna: Well, that's a great tool to have in the exit toolkit. Thanks Lucas. Lucas: Always. And if this episode helped you think about your own exit, consider a coffee at buy me a coffee dot com slash fexingo. Until next time.