Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Pre-IPO Tender Offers for Liquidity
Transcript
- Lucas: So we talk a lot on this show about the big exit moments — the IPO, the acquisition, the direct listing. But there's a quieter liquidity event that's become almost standard practice for late-stage startups, and it doesn't get nearly the attention it deserves. Luna: You're talking about pre ipo tender offers, right? Where a company lets insiders sell shares to outside investors before the public market ever gets a shot. Lucas: Exactly. And it's not just a side note — for a lot of founders and early employees, a tender offer is the first real chance to turn equity into cash. Take Stripe, for instance. They've done multiple tender offers over the years, letting employees and early backers sell billions of dollars worth of stock, all while staying private. It's a way to create liquidity without the scrutiny of an IPO. Luna: Right, and I remember SpaceX has done the same thing. They've had these structured tenders where existing investors like a16z or Fidelity buy shares from employees at a set price. It's almost like a mini ipo, but without the S-1. Lucas: And that's the key — it's a controlled liquidity event. The company decides the window, the price, the size, and who's allowed to participate. You're not leaving it to the whims of an open market. But the trade-off is that you're negotiating with buyers who are very sophisticated — and they know they're taking on illiquidity risk. Luna: So what's the actual mechanism? If I'm a founder at a late-stage startup and I want to run a tender offer, how does that even happen? Lucas: Well, typically the company works with a placement agent — think a firm like Morgan Stanley or JPMorgan — to run a process. They'll approach a handful of institutional buyers, sometimes a single one like Tiger Global, sometimes a small syndicate. The buyers submit bids for a set number of shares, and the company, along with the board, sets a price and allocates how much each seller can unload. Luna: And there's usually a cap on how much each employee can sell, right? A percentage of their total holdings, so the founders don't dump everything and run. Lucas: Yes, and that cap is often tied to the company's broader strategy. You want to reward loyalty, but you also want to retain your key people. So you see caps ranging from ten to twenty percent of vested shares for employees, and perhaps a bit more for founders, depending on the company's stage. Luna: It also sends a signal, doesn't it? When a founder sells in a tender, the market reads that as either a lack of confidence or a sensible diversification move. How do you frame it? Lucas: That's the delicate part. If a founder sells a huge chunk, investors might wonder if they know something. But if it's a small, structured amount, and especially if the company frames it as a standard liquidity program, it's generally fine. In fact, many VCs expect founders to take some chips off the table — it shows they're not irrationally overconfident. Luna: And let's be real — the math is tempting. If your company's valuation just went up, say, from eight billion to twelve billion in a year, selling five percent of your stake at the new mark could set you up for life. But you're betting that the next round or the IPO will be even higher. Lucas: And that's where the psychology gets interesting. Because in late 2026, private valuations are still lofty — we're seeing companies hold off on IPOs because they can get better terms privately. So a tender offer at a high valuation looks like a no-brainer. But you're essentially selling your upside in exchange for certainty. Luna: And then there are the tax implications. If you sell in a tender, you're triggering a taxable event, potentially at short-term capital gains rates if you've held less than a year. That can eat into the windfall significantly. Lucas: Sure, but many founders have held for years, so they'll qualify for long-term rates. Still, there's the alternative minimum tax, or AMT, which can be a nightmare if you exercise options and the value hasn't been realized yet. That's a whole other conversation, but it's relevant when you're deciding whether to sell now or wait for the IPO. Luna: So let's talk about the buyer's side for a second. Why would a fund like Tiger Global want to write a check for private shares when they could just buy a public tech stock like NVIDIA, which is up over six percent in the last five days? Lucas: Because they believe the private company is undervalued relative to its growth, and they're willing to take on illiquidity risk for a potential ipo pop or a next-round markup. Plus, they often negotiate a discount to the latest round's price — say fifteen to twenty percent — to compensate for the lack of a public market. Luna: Right, so the buyers are getting a deal, but the sellers are getting cash now. It's a win-win in theory. But what happens if the IPO gets delayed for years, or the company's valuation drops before a public listing? The sellers who cashed out might look smart for taking the money. Lucas: Exactly. And that's a real risk in this environment. We've seen plenty of companies raise at peak valuations only to see their private marks get slashed in a downturn. For founders, a tender offer can be a hedge against that. You're locking in some of that paper wealth before it evaporates. Luna: And that's a valuable lesson for any founder listening — you don't have to go all in on the eventual exit. Sometimes the smartest move is to take a little off the table when the window opens. Lucas: And if these kinds of conversations are helpful for what you're building, you can keep them coming by supporting the show — buy us a coffee at buy me a coffee dot com slash fexingo. It's a small way to keep this podcast ad-free and independent. Luna: Yeah, we really appreciate it. And speaking of independent, let's get back to the mechanics of a tender offer, because there's a lot of nuance in how the price gets set. Lucas: Right. The price in a tender is typically based on a recent funding round, but it's not always a simple pass-through. The board might apply a discount for lack of marketability, or they might adjust for changes in business performance since that round. Luna: So you could see a tender price that's lower than the last round's price, even if the company is doing well? That seems like it would upset employees. Lucas: It can, and that's why communication is key. But the logic is that a private share is worth less than a public one because you can't sell it easily. And the discount varies — for a hot company, the discount might be tiny, maybe five percent. For a more mature but slower-growing company, it could be twenty or thirty percent. Luna: And then there's the question of who gets to participate. Is it just VCs who buy these shares, or can employees buy more? I've heard of some companies allowing employees to buy shares in a tender too. Lucas: Sometimes, yes. Companies might offer what's called a 'concurrent tender' where existing employees can buy more shares at the same discounted price, or they might allocate a portion of the tender to a new investor while letting existing employees top up their positions. It's a way to keep talent invested in the company's success. Luna: Hmm, that's interesting. So a tender isn't just an exit event — it can also be a way to align incentives and deepen employee ownership. Lucas: Exactly. And it's not just for the pre ipo phase. We've seen companies like Palantir and others use tender offers even after they've gone public, as a way for insiders to sell large blocks without moving the market too much. It's a flexible tool. Luna: So given all this, what's your advice for a founder who's considering running a tender offer in the next six months? What are the key things to think about? Lucas: First, be clear about your goals. Are you looking to provide liquidity for early employees, or are you trying to raise a little capital for the company itself? That changes the structure. Second, work with an experienced placement agent who knows how to bring in the right buyers — you don't want a fire sale. Luna: And third, I'd say think about the tax timing. If you can defer the sale to January, you might delay the tax bill by a year. But that's a long time if you need the cash now. Lucas: Right, and you also need to be prepared for the administrative burden. Running a tender involves legal documents, shareholder approvals, and a lot of coordination with your cap table management platform. It's not trivial, but it's usually worth it for the liquidity it creates. Luna: And what about the signal to future investors? Does a tender offer make it harder to raise a Series C or D? Lucas: Not necessarily. In fact, a well-structured tender can be a positive signal. It shows that existing investors are willing to put real money in at a certain price, which validates the company's value. It also gives you a data point for the next round's price setting. Luna: So it's a way to test the market before you actually have to face the IPO. That's smart. Lucas: Exactly. And as we're seeing in the current market, with companies like Apple and Microsoft trading at record highs on the public side, the private market is eager for exposure to high-growth names. A tender offer can be the gateway. Luna: Well, I think we've given our listeners a solid framework to evaluate whether a pre ipo tender offer makes sense for their situation. Any final thoughts, Lucas? Lucas: Just that liquidity isn't a dirty word. It's a tool for managing risk and rewarding the people who helped build the company. Used thoughtfully, a tender offer can strengthen your company's position, not weaken it.