Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Directed Share Programs to Reward Early Believers
Transcript
- Lucas: So Luna, we talk a lot about the mechanics of an exit — the valuation, the lockup, the earnout. But there's one quiet lever that doesn't get nearly enough attention, and it can make a huge difference in how founders and their earliest supporters feel about the whole process. I'm talking about directed share programs. Luna: Directed share programs — that's when a company sets aside a chunk of IPO shares specifically for people who aren't traditional institutional investors. Customers, employees, maybe even your college roommate. Lucas: Exactly. And the term is a bit dry, but the idea is actually pretty human. When you're about to go public, the underwriters usually allocate the vast majority of shares to big institutions. But a directed share program lets a founder carve out a slice — typically one to two percent, sometimes a bit more — and direct it to people who helped build the company, or who believed in it early, or who are just passionate users. Luna: So it's a way to say thank you, but it's also a strategic move. It can create a base of loyal shareholders who are less likely to dump the stock the day it starts trading. Lucas: Right. And that's a real consideration in the current market. Look at what's been happening this week alone — a lot of tech names are running hot. Meta's up over five percent in five days, Coinbase is up over five percent too, and the ARK Innovation ETF is up three percent. You've got retail investors who are hungry for IPO exposure, and a directed share program can feed that demand in a controlled way. Luna: So who actually sets the rules here? Is it the company, or do the banks get a say? Lucas: It's a collaboration. The issuer — that's the company going public — tells the underwriters, 'We want to set aside X percent of the offering for these groups.' The underwriters manage the mechanics, but the selection of who qualifies is often left to the company, subject to SEC rules. There's a specific rule — Rule 134 under the Securities Act — that allows companies to communicate the availability of directed shares without it being considered an offer, as long as they follow certain conditions. Luna: And that's important because you can't just tweet 'hey, we're going public, want in?' without running afoul of securities laws. Lucas: Absolutely. The SEC has strict rules about what you can say and when. But a well-structured directed share program is completely legal, and it's been around for decades. One of the earliest high-profile examples was Google's IPO back in 2004. They ran a Dutch auction, but they also set aside a portion of shares for people who had searched on Google during the test phase — they called them 'Google Scouts' or something like that. It was a way to reward their earliest users. Luna: I remember reading about that. And then Airbnb did something similar in 2020, right? They let hosts and employees buy shares at the IPO price. Lucas: Yeah, Airbnb's program was one of the most talked-about. They allocated about one percent of the offering — I think it was around 1.4 million shares — specifically for hosts and employees. And it wasn't just a symbolic gesture. Those hosts became brand ambassadors in a new way — they had a literal stake in the platform's success. The stock popped on the first day, and those hosts who held on saw a nice return. Luna: So what's the downside? I mean, why doesn't every company do this? Lucas: There are a few reasons. One, it takes administrative work — you have to verify eligibility, collect investment information, and make sure you're not accidentally violating any rules. Two, there's the risk of dilution, though it's usually small. And three, there's the question of whether the shares will be held or dumped. If a bunch of employees get shares and immediately sell on day one, that can create downward pressure on the stock and look bad. Luna: Right, so it's not a one-size-fits-all. Some companies might decide it's not worth the hassle. Lucas: Exactly. And interestingly, some high-profile companies have actually avoided directed share programs. Palantir, for example, went public in 2020 with a direct listing instead of a traditional IPO, and they didn't use a directed share program. Partly because their stock was already trading on private markets, and partly because their investor base was already quite retail-heavy, thanks to their direct listing approach. Luna: So it's a tool in the toolbox, but not every tool is right for every job. And it's not just about rewarding loyalty — it can also be a way to create a more stable shareholder base. Lucas: That's the key insight. When you have a directed share program, you're bringing in shareholders who have a connection to the company beyond just the numbers. They're more likely to be long-term holders, which can reduce volatility after the IPO. And that's something investors actually look at — the mix of holders can affect how the stock trades in the first few weeks. Luna: And when you think about it, that's a smart move for founders who want to maintain some control over the narrative post-exit. It's not just about the money — it's about who owns the story. Lucas: Speaking of stories, let's take a quick pause here. You know, these conversations we have on the show — they're built on a foundation of listener support. If you're getting value from this podcast, if it's helping you think about your own exit strategy or just making you a smarter business person, consider supporting us. It's what keeps the show ad-free and independent. You can do that at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. And it genuinely makes a difference. Luna: Yeah, it's a small thing that keeps the lights on here, and we appreciate every bit of it. Thanks for considering it. Lucas: Alright, back to directed share programs. So we've talked about the mechanics, but let's get into the weeds a bit. How do founders actually decide who gets in? And what are the pitfalls? Luna: I imagine it's a delicate balance. You want to reward the people who helped you, but you also don't want to leave out someone who might feel slighted. Lucas: That's a real concern. There have been cases where companies faced backlash for excluding certain groups. You have to be thoughtful about the criteria. For example, a SaaS company might direct shares to its most engaged users — maybe the top one percent by usage. But if you define that too narrowly, you could alienate other loyal customers. Luna: So what's the best practice? Is there a typical percentage, or does it vary? Lucas: It varies, but one to two percent of the offering is common. Sometimes more for companies with a strong consumer brand. The key is to make it meaningful enough that recipients feel valued, but not so large that it dilutes the institutional allocation too much. Underwriters want to make sure they have enough shares for their big clients, so they'll push back if the directed program gets too big. Luna: And what about the pricing? Do these participants pay the IPO price, or do they get a discount? Lucas: They pay the IPO price — no discount. That's actually part of the appeal: participants get to buy at the offer price, which on day one is often below the market price, so they get an immediate paper gain. But they're also taking on the same risk as any other investor. If the stock drops, they're in the same boat. Luna: So it's not a giveaway — it's a privilege, but with real financial exposure. Lucas: Exactly. And I think that's what makes it a genuine token of appreciation. You're saying, 'I trust you to be a shareholder, and I'm giving you the opportunity to participate in this milestone.' It's a powerful message. Luna: Now, with the market as hot as it is — you mentioned Meta and Coinbase are up big — do you think we'll see more IPOs using directed share programs this year? Lucas: I think so. The IPO window has been open for a while, and there's a lot of pent-up demand from retail investors. A directed share program can help a company tap into that enthusiasm while also building a loyal base. It's a win-win if done right. But it's not automatic — it requires planning and a clear strategy. Luna: And we've seen some companies get creative with it. I'm thinking of that one where they let customers earn shares by completing certain actions, almost like a loyalty program. Lucas: Right, there have been experiments like that. But the SEC has limits on what you can do — you can't just hand out shares as a marketing gimmick. There have to be legitimate investment grounds. So while the concept is appealing, it's constrained by regulation. Luna: So for a founder listening, what's the takeaway? Should they put a directed share program on their pre ipo checklist? Lucas: I'd say yes, but with a caveat. It's not for everyone. If you're going public via a SPAC or a direct listing, it might not apply. But if you're doing a traditional IPO and you have a strong community — whether that's customers, employees, or a niche group of supporters — it's worth exploring. It can turn your IPO from a financial event into a community moment. Luna: And that community moment can pay off in the long run, not just on day one. Lucas: Absolutely. Because after the IPO, those shareholders are more likely to stick with you through ups and downs. They're not just anonymous institutions; they're your advocates. And in a market like this one, where retail sentiment can move stocks, that's a real asset. Luna: Makes sense. So, any final thoughts on directed share programs? Lucas: Just that they're a reminder that an exit is not just about the numbers. It's about the people who helped you get there. A directed share program is one way to honor that. And if you're a founder thinking about going public, it's worth a conversation with your underwriters early in the process.