Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Pre-Exit Structured Liquidity to Retain Control
Transcript
- Lucas: If you're a founder sitting on a fast-growing company, you probably have this tension — you want to take some chips off the table, but you don't want to signal to acquirers or your own team that you're checking out. So what are the actual tools for getting liquidity without losing control? Luna: And we're not talking about selling the whole company. We're talking about partial liquidity — pre-exit, while you still hold the reins. Lucas: Exactly. And there's a really interesting case that just hit the wires. Together AI, the neocloud startup, just raised 800 million dollars at an 8.3 billion valuation. That's a massive round. But what matters for our conversation is how the founders and early investors structured their own liquidity within that round. Luna: Right — because an 800 million round at that valuation, part of that is almost certainly secondary. The founders sold some shares to new investors while also raising primary capital. Lucas: Bingo. And that's the first tool in the kit: the structured secondary. You sell a portion of your personal stake — maybe 10 to 15 percent — to a crossover fund or a late-stage investor. You get cash. You pay taxes. But you keep the vast majority of your equity and your board seat. Luna: And importantly, the market doesn't read it as a distress signal, because it's part of a large up-round. If you did a standalone secondary with no primary raise, that might look different. Lucas: Exactly. So tool number one: secondary sale within a primary round. Tool number two is the stock pledge — and this one's gotten more popular as private company valuations have climbed. You pledge your shares as collateral for a loan, get cash, and don't trigger a taxable event because you haven't sold. Luna: We did an episode on stock pledges earlier — episode 73 — and the key risk there is margin call if the valuation drops. But in a market where tech stocks have been ripping — Apple up 6.9 percent in five days, Meta up 13.5 — lenders are pretty comfortable. Lucas: Right. The collateral is growing. So pledge against that. But there's a third tool that's less discussed and I think really elegant: the tax receivable agreement monetization. We touched on this in episode 70 and 78, but it's worth revisiting because more founders are using it now. Luna: So a TRA — tax receivable agreement — is basically a contract between the company and the pre ipo shareholders. When the company uses those shareholders' tax attributes to save on taxes, it shares a portion of those savings with the shareholders. And you can monetize that future stream of payments today. Lucas: Right. So you get cash now based on the present value of future tax savings. You don't sell a single share. No dilution. No loss of control. And because it's structured as a contractual payment, not a sale, the tax treatment can be favorable. Of course, you need a willing counterparty — typically a bank or a specialty finance firm. Luna: And that counterparty is taking on the risk that the company's tax situation changes. But in this environment, where corporate tax rates are stable and the TCJA provisions are still in place, it's a manageable risk. Lucas: So those are three tools: secondary sales, stock pledges, and TRA monetization. But here's the thing — the most sophisticated founders stack them. They use a secondary to get immediate cash, a pledge to get a credit line, and a TRA to get a tax-advantaged lump sum. They call it structured liquidity tiers. Luna: We actually did a couple of episodes on structured liquidity tiers — 76 and 77 — but I think the stacking concept is worth drilling into. Because each tool has different costs and benefits, and the order matters. Lucas: Yeah. Let's say you have a founder with a stake worth 100 million on paper. They might do a 10 million secondary — that's 10 percent of their stake — to cover a home purchase or a diversification need. Then they do a 15 million stock pledge loan at a 3 percent interest rate to fund a new venture. And then they monetize a TRA for another 5 million, tax-free essentially. Luna: So they've extracted 30 million, kept 90 percent of their equity, and still have full voting control. And they haven't signaled anything to the market because the secondary was part of a round. Lucas: That's the idea. And one more piece — the exit bonus for key talent. If you're a founder and you want to retain your CTO or your VP of engineering through the exit process, you can structure a bonus that pays out only if they stay through a liquidity event. That's not a liquidity tool for the founder, but it protects the value of the founder's stake. Luna: And we've seen those become more common as companies take longer to go public. Look at Lime — just went public yesterday after years of uncertainty. The employees who stayed got their liquidity eventually, but the ones who left early probably regret it. Lucas: Right. And for founders, the message is: don't wait until the exit to think about liquidity. You can start building your ladder years before. And the tax planning — especially with pre-exit gifting we covered in episode 80 — can save you millions. Luna: You know, speaking of things that save you money — I think a lot of our listeners probably found this breakdown useful. And if you did, this is exactly the kind of content that listener support keeps ad-free. You can help keep the show going at buy me a coffee dot com slash fexingo. Lucas: Yeah, we don't run ads, we don't have sponsors. It's just listener-supported. So if you got something out of this, that's the way to keep it coming. Luna: And we really appreciate it. So, back to the stacking idea — what about the order? You mentioned the order matters. Walk us through that. Lucas: Sure. Typically you'd do the secondary first because it's the cleanest — you sell, you pay tax, you're done. Then the pledge, because you can borrow against the remaining equity. And the TRA monetization last, because it's the most complex and depends on the company's tax situation post-money. Luna: And you'd want to consult with a tax advisor and a lawyer before any of these. But the framework is really powerful. Lucas: Absolutely. And one more thing — put options. We covered those in episode 82. A put option gives you the right to sell your shares at a predetermined price. If you negotiate that with an acquirer during a merger agreement, it's a floor. You can get liquidity even if the deal falls apart. Luna: So there's a whole toolkit. And the unifying theme is: don't bet the farm. Take some chips off the table while keeping your seat at the table. Lucas: Exactly. And that's the mindset we want founders to have. You built something valuable. You deserve to enjoy some of that value before you sell. And the market — whether it's the public market like we're seeing with Lime, or the private market like Together AI — is giving you the tools to do it. Luna: Alright, that's a great place to wrap. Thanks for listening, and we'll see you next time.