Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Contingent Value Rights to Bridge Valuation Gaps
Transcript
- Lucas: So today let's talk about a tool that most founders have barely heard of but that shows up in some of the largest M&A deals on the planet: contingent value rights, or CVRs. Luna: CVRs. I've seen them mostly in biotech mega-deals but I think they're more relevant right now than people realize. Lucas: Exactly. A contingent value right is essentially a contractual promise that if a specific milestone is hit after a deal closes, the seller gets additional cash or stock. It's a way to bridge a valuation gap when the buyer and seller can't agree on the probability of a future event. Luna: And that gap has been huge lately. Just look at META up nearly ten percent in five days — market sentiment shifts fast, and buyers are getting more cautious about paying upfront for uncertain upside. Lucas: Right. And on the other side, you have companies like DeepSeek reportedly in talks to raise one point five billion before an IPO. That kind of private-market optimism doesn't always translate into public-market terms. CVRs can be the bridge. Luna: Walk us through a concrete example. What's the most famous CVR structure? Lucas: The textbook case is Bristol-Myers Squibb's acquisition of Celgene in 2019. The deal was valued at roughly seventy-four billion dollars in cash and stock, but there was a big debate over Celgene's pipeline — specifically a drug called ozanimod, which was awaiting FDA approval. Bristol-Myers wasn't willing to pay full price for an approval that might not happen. So they attached a CVR: shareholders got one tradable right per share, and each right would pay nine dollars in cash if the FDA approved ozanimod by a certain date. Luna: And did it pay out? Lucas: Yes — and no. The FDA approved ozanimod, but after the original deadline. The CVRs eventually paid out, but there was litigation over timing. Shareholders got about four dollars per right after legal fees, not the full nine. It's a cautionary tale: CVRs can work, but the terms have to be airtight. Luna: So the lesson is: define the milestone clearly, and define the timeline clearly. Otherwise you end up in court. Lucas: Exactly. And that's why we're seeing more CVRs in tech deals now too, not just pharma. When a startup has a big contract pending or a regulatory approval — like a patent grant or a clearance from the FTC — a CVR lets the seller get some of that value without the buyer assuming all the risk upfront. Luna: And for founders, the appeal is pretty obvious. You avoid leaving money on the table if your bet pays off. But you also have to live with the uncertainty post-close. You're not fully cashed out. Lucas: Right. You're trading certainty for upside. And that's a very personal decision. Some founders want a clean break. Others are willing to stay involved or at least stay exposed to the outcome. A CVR lets you do that without keeping equity in a company you no longer control. Luna: Let's talk about the structure. How are CVRs typically designed? Lucas: Usually they're tradable or non-tradable. Tradable CVRs are listed on an exchange — like the Celgene ones traded over the counter. That means you can sell them if you want liquidity before the milestone hits. Non-tradable CVRs are locked to the original holder. Most CVRs are non-tradable because buyers don't want a messy shareholder base. Luna: And from the buyer's perspective, what's the appeal? Why not just do an earnout? Lucas: Great question. Earnouts are usually tied to the seller's continued employment or revenue targets. CVRs are tied to a specific binary event — an FDA approval, a patent grant, a product launch. They're more objective. And because CVRs are distributed to all shareholders pro rata, they don't require the founders to stay with the company. That can be cleaner in a hostile or competitive acquisition. Luna: So CVRs are more shareholder-friendly than earnouts in some ways. But they also have a bad reputation. Why? Lucas: Because they often result in litigation. The milestone language is hard to write without ambiguity. What happens if the milestone is achieved but the buyer doesn't put in best efforts? That's a common fight. In the Celgene case, shareholders argued Bristol-Myers dragged its feet on the FDA submission. The company denied it, but the settlement still cost them. Luna: And there's also the tax piece, right? How are CVRs treated? Lucas: It's complicated. For tax purposes, a CVR can be treated as contingent consideration, which means the seller might owe tax when it pays out, not at closing. That can be an advantage — deferring tax until you actually receive the cash. But it adds complexity. Founders need a good tax advisor who's seen CVRs before. Luna: And now with the market where it is — July 2026, rates are still elevated, IPOs are picking up but valuations are choppy — are CVRs becoming more common? Lucas: I think so. We're seeing more contingent structures in biotech, but also in tech. For example, when a company acquires an AI startup whose value depends on a pending patent or a big customer contract, a CVR can bridge the gap. And with headlines like DeepSeek raising at a high valuation before IPO, acquirers are wary of paying peak private prices. Luna: So if you're a founder in the middle of a negotiation and the buyer says 'we love your company but we're not sure about that one product line' — a CVR could be your answer? Lucas: Exactly. You say, 'Fine, pay me eighty percent now and put twenty percent in a CVR tied to that product hitting its milestone.' It aligns incentives. The buyer only pays if the value materializes. You don't leave the upside behind. Luna: It's a tool that rewards conviction. But you have to be willing to bet on yourself. Lucas: And on the other side, buyers need to be careful not to overpromise. If the milestone is too easy to hit, you overpay. If it's too hard, the CVR is worthless and you might as well have negotiated a lower price. Getting the probability right is the whole game. Luna: How do you even price a CVR? That seems like the hardest part. Lucas: You use a probability-weighted expected value. If the milestone is a fifty percent chance of paying ten dollars, the CVR is worth five dollars. But you have to discount for time and risk. And then there's the market's view — if the CVR is tradable, the market price might be lower than your calculation because of uncertainty premium. Luna: And that's where things get interesting. If the CVR is undervalued, a savvy investor could buy them up and make a bet on the milestone. Lucas: Exactly. There's a whole niche of hedge funds that specialize in CVR arbitrage. They buy CVRs when they think the market is too pessimistic about the milestone. It's a high-risk, high-reward strategy. Luna: Have we seen any recent CVRs that actually worked well? Lucas: Sanofi's acquisition of Ablynx in 2018 included a CVR tied to approval of caplacizumab. That milestone was met, and the CVR paid out about three euros per share within a year. Clean terms, no litigation. That's the ideal: simple, binary, and well-documented. Luna: So when should a founder push for a CVR versus just taking a lower upfront price? Lucas: If you have high confidence in the milestone and you can afford to wait, a CVR is great. If you need a clean exit or you're worried about the buyer's behavior post-close, take the cash. And always, always hire a lawyer who has done CVRs before. The first-time mistake is assuming the CVR will be self-executing. It won't be. Luna: It's a bit like an earnout in that sense — both require careful drafting and a relationship of trust. Lucas: Right. And trust is rare in M&A. Which is why CVRs often end up as a tool of last resort — a way to save a deal that's stuck on price. But when they work, they create a bridge that lets both sides walk away feeling like they got a fair outcome. Luna: Speaking of bridges — if you're listening and you find these deep-dive tools useful for your own negotiations, you might want to support the show. We keep it ad-free because listener support makes that possible. Lucas: Yeah, it's pretty simple. If the show helps you think about exits differently, you can toss a coffee our way at buy me a coffee dot com slash fexingo. No pressure, just helps us keep the lights on. Luna: Exactly. And now back to CVRs — one more thing I want to ask: how do CVRs interact with lockup agreements in an IPO context? Lucas: That's a great question. In an IPO, CVRs are rare because there's no acquiring company to issue them. But in a de spac merger, CVRs are becoming more common. The SPAC sponsor might issue CVRs to public shareholders if the combined company hits certain stock price targets. It's a way to align incentives and sweeten the deal. Luna: So CVRs are popping up everywhere, not just in classic M&A. Lucas: Exactly. And given today's environment — with volatility in names like Tesla and Coinbase, and big swings in sentiment — I think we'll see more of them. Any tool that lets parties share risk and reward without forcing a binary outcome is going to be popular. Luna: Especially when buyers are scarred from overpaying in 2021 and 2022. They want to cap their downside. Lucas: And sellers want to capture the upside. A CVR is the compromise. It's not perfect, but it's often better than a deal blowing up over a few percentage points of valuation. Luna: Alright, so to wrap: CVRs are a way to bet on a specific future event, they require airtight legal language, and they're gaining traction beyond pharma. For founders, they're worth understanding — even if you never use one. Lucas: Exactly. Knowledge is leverage. And in a negotiation, knowing about CVRs might be the thing that saves your deal. Thanks for listening.