Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Pre-Exit Secondary Sales to Lock In Liquidity
Transcript
- Lucas: So Luna, we talk a lot about the big exit moment — the IPO, the acquisition — but there's a quieter, equally important liquidity event that's been growing in the background: the pre-exit secondary sale. Luna: Meaning founders sell some of their shares before the company goes public or gets acquired. It's not exactly a new idea, but I've noticed it's becoming more common in the last couple of years. Why now? Lucas: Right. And it's worth noting the market context we're in right now, mid-August 2026. Mega-cap tech has had a rough week — Amazon is down 5.6% over the last five days, Google down 3.3% — and that sort of volatility makes founders think twice about waiting for a public listing to diversify their net worth. Luna: So they're essentially de-risking their personal portfolio while the company is still private. But how does that actually work in practice? Lucas: There are a few structures, but the most common is a tender offer. The company creates a window where existing shareholders — often just founders and early employees — can sell a limited percentage of their shares to outside investors. That's usually at a valuation that's a slight discount to the latest round, because the buyer is taking on private-company risk. Luna: And the founders get cash now, but they don't fully exit. They keep the majority of their equity for the eventual big event. Lucas: Exactly. And that's what separates a secondary sale from a full exit. You're selling a slice, not the whole pie. Typically a founder might sell anywhere from 5 to 15 percent of their stake in these pre ipo secondaries. That gives them a meaningful chunk of liquidity — often millions of dollars — without losing control of the company. Luna: Let's put a concrete number on it. Say a founder holds 20 percent of a company valued at one billion dollars in its last round. A 10 percent secondary sale would put roughly twenty million dollars in their pocket, before taxes. That's a life-changing amount. Lucas: And one of the key reasons this is accelerating is that the traditional path to liquidity — the IPO — has become less predictable. We've seen that in the past few years: the IPO window opens and closes, and even when it's open, the aftermarket can be brutal. Luna: But doesn't selling early leave money on the table? I mean, if the company doubles in value by the time it goes public, you've sold at a discount. Lucas: That's the trade-off, and it's a real one. But founders are increasingly willing to take that risk off the table. Look at a company like Rivian — they had a rough couple of years after their IPO, and the stock has been volatile. A founder who sold 10 percent in a pre ipo secondary would have avoided that downside. It's portfolio insurance, in a sense. Luna: So it's about balancing the upside potential with the need for certainty. But how do these sales affect the cap table and the company's dynamics? Lucas: That's the part that a lot of founders underestimate. When you bring in a new investor through a secondary sale, they're not writing a check to the company — they're buying shares from you. So the company doesn't get any new capital. That means the new investor has no obligation to help the company grow; they're purely a financial holder. That can create friction down the line. Luna: So you want investors who are aligned with the company's long-term vision, not just someone who's looking for a quick flip. Lucas: Right. That's why many founders prefer to sell to existing investors or to funds that are known to be founder-friendly. Some companies even restrict secondaries to existing shareholders to avoid introducing new voices to the board. But that limits your pool of buyers. Luna: There's also the tax angle, which we touched on in a previous episode about QSBS, but what's the general rule for secondary sales? Lucas: Well, if you've held the shares for more than a year, you're looking at long-term capital gains — the top federal rate is 20 percent, plus the 3.8 percent net investment income tax, so roughly 23.8 percent. But if you qualified for QSBS, you might be able to exclude a significant portion of that gain entirely. The rules are strict, but for founders of qualifying small businesses, it can be a huge win. Luna: So a founder who sells early can actually end up with more after-tax cash than if they sold after the IPO, because they've locked in the lower rate and avoided the higher income tax rates that apply on ordinary income. Lucas: That's a great point, and it's one that a lot of founders overlook. They think 'I'll wait for the IPO and then sell everything,' but once you're public, your compensation packages often shift to a mix of salary and restricted stock units, which are taxed as ordinary income. The secondary sale is pure capital gain, and if you've held for over a year, that's a much more favorable rate. Luna: Let's talk about the signal it sends to the market. If a founder is selling shares in a secondary, does that look like a lack of confidence? Lucas: It can, if it's not handled right. But in practice, investors understand that founders have concentrated wealth and need to diversify. The key is transparency. If you structure it as part of a planned liquidity program, and you communicate that you're retaining the majority of your stake and remain committed to the company, it's usually fine. The problem is when a founder quietly dumps a big chunk without explanation. Luna: And that's where the 5-day performance of stocks like Amazon and Google comes in — the market reacts to signals. If a founder sells a large stake right before a negative earnings report, that's going to be interpreted poorly. Lucas: Exactly. So timing matters a lot. That's why many founders work with a financial advisor to plan these secondary sales in a way that minimizes market impact and aligns with broader liquidity goals. Luna: I've also heard that some companies are using secondary sales as a way to retain talent — giving employees a chance to cash out, not just founders. Lucas: Absolutely. That's a huge trend. In fact, many companies now offer annual or semi-annual liquidity events for all employees, not just the founding team. It's a way to reward early staff and reduce the pressure to leave for a competitor that offers better cash compensation. It's become a standard tool in the startup toolkit. Luna: So it's not just about the founder's personal exit — it's about the health of the whole company. Which brings us back to the broader point: in a market like this, where public listings are uncertain, secondary sales are a way to keep everyone motivated. Lucas: Right. And if you're a founder thinking about your own exit, the takeaway is that you have more options than just 'wait for the IPO.' A well-structured pre-exit secondary can give you financial security without giving up your dream. But it's not a decision to make lightly. Luna: Totally. It's a strategic move that requires careful planning and good advice. And speaking of advice, we always say that if these conversations are useful for what you're building or running, you can support the show by buying us a coffee at buy me a coffee dot com slash fexingo. It helps keep this podcast ad-free, and we really appreciate it. Lucas: Yeah, every little bit helps us keep bringing you these deep dives into startup finance. Now, back to the strategies — one thing we haven't talked about is the role of the board in approving these secondary sales. Luna: Right, because the board has to sign off on any transfer of shares, even if it's just a founder selling their own stock. Lucas: Exactly. And that's where it gets interesting. Some boards are very supportive, because they see it as a way to retain key talent and prevent founder burnout. But others worry about the optics, or they may have a right of first refusal that allows the company to buy back the shares instead. That can actually be a benefit — the company can repurchase the shares at the same price, which helps the founder without introducing a new shareholder. Luna: So the company might be the buyer in some cases. That's a clean solution if the company has the cash. Lucas: Yes, but it's not always the best use of capital. Companies often have better things to do with their cash, like investing in growth. So it's a balance. But it's a tool that exists. Luna: Let's also touch on the valuation aspect. How is the price for a secondary sale determined? It's not like there's a public market. Lucas: It's usually based on the most recent funding round, with a discount applied for lack of liquidity. That discount can range from 10 to 30 percent, depending on how far away the company is from an exit. If you're six months from an IPO, the discount might be small; if you're two years out, it could be larger. Luna: So you're essentially taking a haircut to get cash now. Lucas: Yeah, that's a fair way to put it. But for many founders, that haircut is worth it to diversify their assets and reduce stress. A founder with 95 percent of their net worth tied up in their company is taking a huge risk. A secondary sale can bring that down to 80 percent, which is much more manageable. Luna: And in a market where tech stocks are jittery — I mean, NVIDIA is up 3.5 percent this week, but Rivian is down 6.3 percent — the volatility is real. Having some cash outside the company is just smart. Lucas: Exactly. And that volatility is actually one of the reasons we're seeing more secondaries now. Founders are listening to the news, seeing the ups and downs, and realizing that they can't control the public market. But they can control when they take some chips off the table. Luna: So our advice for any founder listening: if you're thinking about a secondary sale, start planning early. Understand your tax situation, talk to your board, and get legal advice on the structure. It's a powerful tool, but only if it's done right. Lucas: And one more thing — don't forget that secondary sales can also affect your future fundraising. If you're selling a large chunk, future investors might wonder if you're losing conviction. So it's important to frame it as part of a broader personal financial plan, not a reaction to the market. Luna: That's a good note to end on. Thanks for the breakdown, Lucas. Lucas: Anytime. And to our listeners, keep building. We'll catch you next time.