Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Pre-IPO Stock Lending to Avoid Selling
Transcript
- Lucas: So there's this move we're seeing more of lately. A founder takes a loan against their own shares instead of selling them into a secondary transaction. It's not entirely new, but the scale and the specific terms are shifting. And I think it tells us something about where we are right now in the market cycle. Luna: pre ipo stock lending. I've seen a few headline deals. But I'm still fuzzy on the mechanics — how does a lender even value shares that aren't publicly traded yet? Lucas: Right, that's the crux. The lender — usually a specialty finance firm or a private bank — hires an independent valuation firm to run a model. They look at the latest round price, the company's revenue growth, churn, the secondary market for the stock, the volatility of comparable public companies. Then they apply a haircut. I'm talking about a significant discount, typically between twenty and fifty percent. Luna: So if the last valuation was $10 billion, you're borrowing against, say, $5 billion of that, tops. Lucas: Exactly. And the most interesting case I've seen in the last few months is a fintech company — I won't name it, but it's late-stage, about to file confidentially. The founder borrowed two hundred million dollars against a roughly billion-dollar stake. Twenty percent haircut. Two-year term. Interest rate pegged to LIBOR plus four hundred basis points. Luna: Two hundred million. That's a huge bet on the stock price not cratering during the loan period. And they didn't want to sell at all? Lucas: Didn't want to. The founder told me — off the record — that selling even a small portion would signal a lack of confidence to the board and to early investors. They also wanted to maintain voting control. This company has dual-class shares, and the founder's shares carry ten votes each. Selling would convert those to one-vote shares. The loan lets them keep the voting structure intact. Luna: That's a powerful incentive. And there's the tax angle too, right? No capital gains event since you're not selling. Lucas: Exactly. The IRS treats a loan as debt, not a disposition. So no taxable event. The founder gets cash now, and if the company IPOs or gets acquired within the loan term, they can repay the loan by selling a smaller number of shares at higher price. But of course, it's not risk-free. Luna: The obvious risk: the stock drops below the loan to value threshold and the lender issues a margin call. The founder has to come up with cash or more collateral, or they lose shares. Lucas: That's the nightmare scenario. And it played out for a few founders in 2022 when the NASDAQ dropped over thirty percent. Suddenly, those loans that seemed conservatively structured were underwater. Some lenders forced sales of pledged shares at the worst possible time. The founder I mentioned is aware of that history. That's why they structured the loan with a two-year term, not a demand loan. The lender can't call it early unless the founder defaults on interest payments. Luna: So they locked in the terms. That's smart. But what about the lender? What's their upside? They're just collecting interest, right? Lucas: The interest is substantial. On two hundred million at LIBOR plus four hundred, you're looking at roughly eight to nine percent annually. Plus the lender might negotiate warrants — the right to buy shares at a discount if the IPO happens. So they get a piece of the upside if things go well. And if the founder defaults, they get the shares at the loan amount. Luna: So it's like a structured bet. The lender is essentially taking a position in the company via debt with an equity kicker. Lucas: Precisely. And this is becoming more common because the IPO market has been — well, look at the last five days. The NASDAQ down about five point eight percent. Apple at $294, down one point seven. Palantir at $116, down twelve percent. It's choppy. Founders who would have sold in a secondary offering six months ago are now hesitating. They don't want to lock in a low valuation. So they borrow instead. Luna: It's also a signal to employees, right? If the founder is borrowing against shares rather than selling, it suggests they think the stock is undervalued. Lucas: Absolutely. There's a signaling component. And employees often have their own concentrated positions. If they see the founder taking a loan, it normalizes that behavior. It can reduce pressure for secondary sales. But it also creates a new kind of risk: the company's cap table becomes partially collateralized to outside lenders. If multiple founders do this, and the stock drops, you could have a cascade of margin calls that forces a lot of shares onto the market at once. Luna: That's systemic risk at the company level. Have we seen that happen yet? Lucas: Not in a major way, but the conditions are there. In the private markets, there are now billions of dollars in these stock loans outstanding. If we get a significant correction — say another thirty percent drawdown — some of these loans will break. The interesting thing is that the lenders are sophisticated. They stress-test. But no model captures panic perfectly. Luna: This is exactly the kind of conversation that's useful for founders and operators thinking about their exit strategy. And it's why we keep this show ad-free — no sponsors pushing products, no agenda. If these episodes help you make better decisions, that's the point. If you want to support that, the link is buy me a coffee dot com slash fexingo. Lucas: Glad you mentioned that. We believe in letting the content speak. So back to the loan structure — one thing I haven't touched on is how the loan gets repaid. Most of these are structured as bullet payments: the entire principal plus accrued interest is due at maturity. So the founder needs a liquidity event — an IPO, an acquisition, or a secondary sale — within the term. Luna: That's a lot of pressure on timing. What if the IPO window closes? Like what if the Fed raises rates again and the market tanks? Lucas: Then the founder has to find another lender to refinance, or negotiate an extension. That's not automatic. The existing lender has no obligation. So founders who take these loans are essentially making a bet on the market environment. The ones who succeed are the ones who have a clear timeline and a backup plan. Luna: What other terms should founders watch for? I've heard about 'negative pledge' clauses. Lucas: Yes. A negative pledge prevents the founder from pledging the same shares to another lender. That's standard. But there's also something called a 'springing lien' — if the founder defaults on any other debt, the lender can step in and take the shares. Founders need to map their entire debt picture before signing. Luna: And the interest payments — are they usually cash or capitalized? Lucas: Most are cash-pay quarterly. But some loans allow the interest to be added to the principal, known as Pay-in-Kind. That can be dangerous because the loan balance grows. But it's useful if the founder wants to conserve cash. Luna: So the key takeaway: stock lending is a powerful tool for founders who are confident in their company's trajectory and don't want to dilute their voting power or trigger a tax event. But it introduces leverage and timing risk. Lucas: Exactly. And the market is only going to see more of these deals. I spoke with a banker last week who said his firm's stock loan book has grown forty percent year-over-year. It's becoming a standard part of the founder toolkit. But like any tool, you have to know when — and when not — to use it. Luna: Let's leave listeners with a question: if you're a founder with a concentrated stake, would you rather sell ten percent today at a known price or borrow against it and hope for a better exit tomorrow? There's no right answer, but the choice defines your risk profile.