Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Are Using Tax Receivable Agreement Monetization for Pre-Exit Liquidity
Transcript
- Lucas: So one of the quieter moves I'm seeing in late-stage founder liquidity right now involves something most people have never heard of: the tax receivable agreement. Or TRA, for short. Luna: I've seen those in SPAC deals — the sponsor gets a TRA, right? But founders too? Lucas: Exactly. They've been around for decades in the partnership space, but over the last two years, a handful of pre ipo founders have started monetizing their TRAs for cash before the actual IPO happens. And I mean serious cash — we're talking tens of millions of dollars in some cases. Luna: Walk me through the mechanics. How does a founder even have a TRA? Lucas: So the TRA arises when a company converts from a partnership or an LLC to a C-corporation ahead of going public. That conversion — typically an election under Section 754 of the tax code — creates a step-up in the tax basis of the company's assets. The company gets future tax deductions — essentially, it can write off that step-up over 15 years. The TRA is a contractual right that entitles the founder to a share of those tax savings, usually 85 percent of the cash benefit the company actually realizes. Luna: So the founder gets a cut of the tax shield. But normally that's paid out over time — year after year — matching when the company uses the deductions. The innovation here is accelerating that payout. Lucas: Right. Instead of waiting 15 years for that cash flow, the founder sells the TRA to an institutional investor — typically a private equity firm or a hedge fund that specializes in tax assets — for a lump sum today. The investor then collects the annual payments from the company. The founder gets liquidity pre ipo, avoids selling common stock, and defers any capital gains event until much later. Luna: And this is happening now because...? Lucas: Because the IPO window has been choppy. We're sitting here on June 23, 2026, and the S&P 500 is down about 4 percent in the last week alone. Palantir dropped 11 percent in five days — it's at $119.50 as of this morning. Founders who were planning to sell shares in an IPO or a secondary offering are looking at less favorable pricing. So they're getting creative. TRAs are one of those assets they can monetize without hitting the equity market. Luna: I recall that in the direct listing boom of 2025, a few companies had massive TRAs. One cloud infrastructure firm — I think it was the one that went public via direct listing in Q1 of this year — had a TRA valued at over $2 billion. Lucas: That's the one. The company was valued at roughly $15 billion at listing, and its TRA was estimated at $2.1 billion. The founder, who had previously been a partner in the LLC structure, held a TRA entitling them to roughly 85 percent of the tax savings. They monetized about $400 million of it in a private placement six months before the direct listing. That $400 million gave them liquidity without touching their equity. Luna: And the buyer? Who's writing that check? Lucas: Typically, it's a fund that specializes in tax-advantaged investments. Firms like Blackstone's tax-oriented credit group, or a few dedicated TRA funds that have emerged in the last three years. They underwrite the TRA like any other cash-flow asset: they model the company's taxable income over the next 15 years, discount it back, and pay the founder a present value that's usually 70 to 80 percent of the expected cash flows. The discount accounts for timing risk, the chance the company might not have enough taxable income to use all the deductions, and some legal risk around the TRA's enforceability. Luna: But what about the IRS? There's a recapture provision, right? If the company fails to generate enough taxable income, the deductions get clawed back. Lucas: That's the single biggest risk. If the company never becomes profitable enough to use the tax deductions, the TRA payments stop — and the founder might even have to repay some of the money if there's a recapture event. The contracts typically include a 'clawback' provision, but the investor bears most of that risk. They're sophisticated enough to model different scenarios. And honestly, for a high-growth tech company, the tax base is usually so large that even moderate profitability generates enough income to absorb the deductions. Luna: So who's actually doing this? I imagine it's not the first-time founder with a $50 million exit. This is for companies with huge tax bases. Lucas: Correct. The threshold is usually a TRA worth at least $50 million to make the legal and structuring costs worthwhile. So we're talking about companies with pre ipo valuations above $1 billion, often $5 billion or more. The sectors where this is most common are software, fintech, and biotech — anywhere the company was originally structured as a partnership or LLC for tax efficiency. Also, companies that came out of a roll-up, like a group of pe backed acquisitions folded into one entity. Luna: Interesting. And does this conflict with the trend of secondary sales we covered in episode 58? I mean, founders can already sell shares in a pre ipo secondary. Lucas: It's complementary, not competing. The TRA monetization is non-dilutive — you're not giving up equity. And it's tax-deferred: the money from the TRA sale is treated as a loan or a prepayment, not a capital gain, so there's no immediate tax bill. That's a huge advantage. In a secondary sale, you trigger a capital gain. So for founders who want to diversify but don't want the tax hit, TRA monetization is a powerful tool. Luna: And honestly, if that kind of specific, actionable information is useful for what you're building or running, then you know what keeps this show going — Lucas: Yeah. If today's episode was worth a coffee to you, there's a link at buy me a coffee dot com slash fexingo. Seriously, it's the smallest possible way to show support, and it lets us keep doing deep dives like this without any ads. Luna: Exactly. It's that simple. And it genuinely helps. So — back to the TRA — what should a founder who's considering this watch out for? Lucas: Two things. First, the TRA must be structured so that the sale doesn't trigger an acceleration of the tax deductions — that would ruin the economics. That requires careful drafting by tax counsel. Second, there's a timing risk: if the company's IPO is delayed or canceled, the TRA's value might drop because the company stays private longer, generating less taxable income. So you want to monetize when the IPO is reasonably certain — usually 6 to 12 months out. Luna: Any notable failures? I know TRAs have been around for a while, but I can't recall a founder getting burned. Lucas: Not many public failures, because TRAs are private contracts. But there was a case in 2023 where a SPAC merger target had a TRA that was overvalued — the company's revenue projections were too optimistic, and the tax deductions were never fully used. The TRA investor took a haircut, and the founder had to return part of the upfront payment. That scared some people off, but the market has matured since then. Underwriting is tighter. Luna: So what's the takeaway for a founder listening today? Lucas: If you have a TRA and you're targeting an IPO in the next 12 to 18 months, it's worth exploring a monetization. The current rate environment — with the ten-year Treasury around 4.3 percent — makes the present value of those future cash flows attractive. You can get liquidity without selling a single share, without triggering a tax event, and without diluting your ownership. It's one of the few win-win liquidity tools out there. Luna: And if you don't have a TRA? Is there any way to create one? Lucas: Not really — it's a byproduct of the corporate conversion. But some founders are structuring their companies as LLCs from the start with the intention of converting later, specifically to get a TRA. That's a longer-term play. For right now, the opportunity is for founders who already have one and haven't monetized it yet. The market for TRA monetization is still relatively small — maybe 15 to 20 deals a year — but it's growing fast. Luna: And I imagine the next evolution is that we'll see tra backed ETFs or something similar? Lucas: I think you'll see more structured products — like tra based notes or funds that pool multiple TRAs for diversification. But that's a few years out. For now, it's a bespoke, institutional market. But for founders in the right position, it's a game-changer.