Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Tender Offers for Pre-IPO Liquidity
Transcript
- Lucas: So there's this moment every founder of a late-stage startup faces. You've built for six, eight, ten years. The company is worth billions on paper. But your personal net worth is entirely in illiquid stock. You can't buy a house with a cap table entry. Luna: Right — and historically the only real option was to wait for an IPO or an acquisition. But that's changing fast. Lucas: Exactly. One of the most underappreciated tools in the founder liquidity toolkit is the company-run tender offer. Not a secondary sale on a platform like Forge or EquityZen, but a formal offer from the company itself to buy back shares from employees and early investors at a fixed price. Luna: It's essentially the company creating its own mini-liquidity event before the big one. How does it work in practice? Lucas: The board approves a specific dollar amount — say $500 million — to repurchase shares. They set a price, usually based on the most recent 409A valuation or the last round's price. Then current shareholders can elect to sell some or all of their stock back to the company. It's voluntary, it's structured, and it gives the company control over who sells and how much. Luna: And it's been happening a lot recently. I think Stripe has done multiple tender offers. SpaceX has been running them consistently for years. Lucas: Stripe's 2024 tender offer was a great example — they set aside something like $1.5 billion for employee liquidity at a $70 billion valuation. And SpaceX has been doing tender offers almost annually since 2020, allowing employees and early investors to cash out while the company stays private and continues building. Luna: What's the advantage over just selling on a secondary marketplace? Lucas: Control and price. In a secondary marketplace, you're selling to outside buyers — hedge funds, family offices — who often demand a discount because they're taking on illiquidity risk. A company-run tender offer can be priced at the most recent valuation, or even a slight premium, because the company is using its own cash. Plus, the company gets to decide who participates. It can cap insider sales to avoid dilution of control. Luna: But it does use company cash. That's money not going into R&D or hiring. Lucas: That's the trade-off. But for companies that are generating revenue or have strong balance sheets, it's a tool to retain talent. If you're a key engineer sitting on options that are worth $10 million on paper but you can't touch them, you might leave for a public company where you can vest and sell. A tender offer keeps you locked in. Luna: And the tax treatment is different too, right? If it's structured as a qualified tender offer under Section 409A, you can defer the tax. Lucas: That's a critical nuance. A qualified tender offer allows employees to sell shares and only pay tax on the gain at that point, not on the entire spread between grant price and sale price. But it has to meet specific SEC and IRS rules — it can't be more than one in a twelve-month period, and it has to be open to all holders of the same class of stock. Luna: So it's not something you can just do on a whim. There's real legal and accounting prep involved. Lucas: Absolutely. And we're seeing more companies set up regular tender offer programs — almost like a quarterly or annual liquidity window. Databricks did it. Robinhood did it before its IPO. It's becoming standard practice for any company that's staying private past the five-year mark. Luna: It also changes the dynamic with investors. If you're a venture capital firm, you might not love a tender offer because it uses cash that could have gone to growth. But if you're a founder, it's your life savings we're talking about. Lucas: Right, and that tension is real. I've spoken to founders who had to fight their board to get a tender offer approved. The board says, 'We need that cash for the next product cycle.' The founder says, 'I need to buy a house and pay for my kids' school.' Luna: And the board usually wins, unless the founder has a strong independent director who understands retention risk. Lucas: Exactly. That's why we're seeing more founders negotiate tender offer provisions in their Series B and C term sheets — a guaranteed liquidity event within a certain timeframe. Luna: Let's talk about a real-world example. Palantir — it's down over 11 percent in the last five days. Their stock is at $119.62. If you were a Palantir employee who held through the direct listing in 2020, you saw a huge pop and then a volatile ride. Tender offers could have been a way to de-risk. Lucas: Palantir actually did a pre ipo tender offer in 2015 — they allowed employees to sell up to 25 percent of their vested shares at a $20 billion valuation. That was a lifeline for early employees who had been holding since 2003. And it didn't dilute the company because the shares went back to the treasury. Luna: So you're essentially saying: tender offers are a way to create liquidity without giving up ownership to outsiders and without the volatility of a public market. Lucas: That's the ideal case. And in today's market, where IPOs have been lumpy — we've seen a slowdown in 2026 compared to the boom years — tender offers give founders a Plan B. They don't have to wait for a perfect IPO window. Luna: Speaking of waiting — this episode is exactly the kind of practical information that helps if you're building or investing in a company. If it made your commute or your coffee break more useful, you can support the show at buy me a coffee dot com slash fexingo. It's the smallest possible ask, and it keeps us ad-free. Lucas: Yeah, a listener-supported model means we can dive into these niche topics without chasing clicks. So if today's episode was worth a coffee to you, that's the link. Back to the mechanics — one thing I want to highlight is the importance of pricing. Luna: Pricing the tender offer correctly — too low and nobody sells, too high and you overpay for stock that might not be worth it. Lucas: Right. The standard approach is to use the 409A valuation, which is supposed to be a fair market value. But 409A valuations are often conservative — they're done by independent appraisers who discount for illiquidity. So the tender price might be lower than what you'd get in a secondary sale. Luna: Which creates a weird incentive: insiders might prefer selling on the secondary market if they can get a higher price, even if it means less control. Lucas: That's why some companies run tender offers at a small premium to the 409A — say 10 to 15 percent higher — to make it attractive. It's a balancing act. You want to give employees a fair price, but you don't want to set a precedent that inflates the cap table. Luna: And the SEC has been looking at this more closely. In 2025, they proposed new rules around tender offers for private companies to protect retail investors who might be buying in secondary markets. Lucas: That's a great point. The SEC's concern is that if a company runs a tender offer at one price, and then six months later there's a secondary sale at a much higher price, it creates a misleading signal. So they've pushed for more transparency around pricing and volume. Luna: So if you're a founder listening, what's the one takeaway? Lucas: Don't wait until the IPO to think about liquidity. Start building a tender offer strategy two to three years before your expected exit. Talk to your board, get tax advice, and set up a regular liquidity program. It will retain your team, give you personal financial flexibility, and make the eventual IPO smoother because everyone's already had a taste of liquidity. Luna: And for investors — if you're on a board, don't reflexively block tender offers. They can be a powerful retention tool that actually increases the company's long-term value. Lucas: Exactly. We'll put links to some tender offer templates and SEC guidance in the show notes. Next episode, we're going to look at the other side of the coin — how founders use post ipo lockup derivatives to hedge their positions. That's a whole different beast. Luna: Looking forward to it.