Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Secondaries for Pre-IPO Liquidity
Transcript
- Lucas: If these conversations are useful for what you're building or running, stick around — because the exit path is changing faster than most founders realize. Today I want to talk about something I am seeing more and more in late-stage private companies: structured secondary sales as a tool for founder liquidity before an IPO. Luna: You mean selling shares before the company goes public, but in a way that doesn't spook the market or signal that the founder is bailing? Lucas: Exactly. The old playbook was: you wait until the IPO lockup expires, then you sell. But that creates a concentrated risk — you have all your wealth in one stock, and the market might react negatively if you sell a big block right after lockup. Luna: Right, because it looks like the founder has no faith. Lucas: So what we're seeing now is a more deliberate approach: a founder negotiates a secondary sale — typically to a dedicated secondary fund or through a special purpose vehicle — while still private. The key is that it's structured. Not just 'I want to sell 10 percent of my shares,' but a carefully planned process with tiered pricing, volume limits, and often a lockup on the remaining shares. Luna: Can you give me a concrete example? I think listeners need to see how this actually works. Lucas: Sure. Let's use a hypothetical that's grounded in what we're seeing in the market today. Say you're a founder at a late-stage AI company — let's call it 'Axiom AI' — valued at around $12 billion. You own 8 percent of the company. You want some liquidity, but you don't want to wait two years for an IPO that might not happen. So you run a structured secondary: you offer 15 percent of your stake — about $144 million worth — to a consortium of secondary buyers at a 10 percent discount to the last round's price. You also agree to a six-month lockup on the remaining shares. Luna: So you take a small discount, but you get cash now, and the buyers know you're still aligned because you're locked up on the rest. Lucas: That's the trade. And the market context right now makes this more relevant than ever. Look at the tickers we have: Apple up 3.7 percent in the last five days, NVIDIA down 4 percent. Growth stocks are volatile. Companies that might have gone public in 2025 are waiting because the window is uncertain. So founders are sitting on paper wealth that could evaporate. Luna: And we've seen some big names in AI raise at huge valuations — like Colossal Biosciences reportedly in talks at $20 to $30 billion — but those valuations don't mean anything if you can't convert them to cash. Lucas: Right. So structured secondaries are becoming a standard part of founder exit planning. And the mechanics are important: you don't just sell to anyone. You want sophisticated buyers who understand the company and won't create a fire sale. Typically you use a placement agent, you run a process with maybe five to ten buyers, and you price based on a combination of the last round, comparable public companies, and a liquidity discount. Luna: And this doesn't affect the IPO timeline negatively, if done right? Lucas: It shouldn't, as long as it's disclosed and the buyers are long-term holders. Some companies actually encourage it because it diversifies the shareholder base. And there's a growing ecosystem of funds — like Industry Ventures, Forge Global, EquityZen — that specialize in these transactions. Luna: It feels like the secondary market has matured a lot in the last five years. Lucas: Hugely. And one reason is the rise of SPVs — special purpose vehicles — that allow smaller investors to participate in these secondary deals. So a founder can sell a chunk to a SPV that pools money from accredited investors, and that creates more demand without requiring a single huge check. Luna: Before we go deeper, I want to mention something about this show. Lucas, you and I put a lot of work into these episodes — researching, scripting, recording — and we deliberately don't run ads on them. That's a choice. If you find value in what we're doing, the link to support that choice is buy me a coffee dot com slash fexingo. It's a simple way to keep this ad-free. Lucas: Yeah, and we really appreciate those who do. It lets us focus on the substance without distractions. So back to secondaries — another nuance is the tiered pricing I mentioned. Some structured secondaries use a 'waterfall' pricing: the first $50 million sells at a 5 percent discount, the next $50 million at 10 percent, and so on. That incentivizes buyers to act early and gives the founder a better average price. Luna: That's clever. It creates urgency, but also fairness. Lucas: Exactly. And it's a sign of how sophisticated these transactions have become. Ten years ago, a founder selling pre ipo was almost taboo. Now it's a legitimate liquidity strategy. But it's not without risks. One is that the secondary price can become a reference point for future rounds — if you sell at a discount, later investors might expect a similar or better price. Luna: So you need to be careful about the optics. Lucas: Right. That's why many founders work with financial advisors who specialize in this. They model scenarios: what if the company's valuation drops 20 percent before the IPO? What if it doubles? They stress-test the timing and the amount. Luna: And for founders who are earlier stage — say, Series B — is this ever appropriate? Lucas: Less common, because the company's trajectory is less certain. But we are seeing some Series B companies allow small secondary sales — maybe 5 percent of a founder's stake — as a retention tool. It's a way to give the founder some financial breathing room without diluting the company's equity. Luna: That makes sense. If a founder is worried about personal finances, they might make bad decisions for the company. Lucas: Exactly. So structured secondaries are increasingly seen as a governance tool, not just a liquidity event. And I think we'll see more of this as the IPO market remains choppy. Look at the data: the S&P 500 is up, but individual growth stocks are all over the place. The window for IPOs is unpredictable. Founders need alternatives. Luna: So what's the one takeaway you want listeners to remember? Lucas: If you're a founder with significant paper wealth in a private company, don't wait for the IPO to think about liquidity. Start planning at least 12 to 18 months before you might want to sell. Talk to advisors, understand the secondary market, and consider a structured sale. It can give you financial freedom while keeping you aligned with the company's long-term success. Luna: And for investors listening — secondaries can be a great way to get into a high-growth company at a discount. Just do your homework on the structure. Lucas: Right. And on that note, I'll leave you with a question: if you were a founder, at what valuation would you start thinking about selling a small piece? For me, it's probably around $500 million. But I'd love to hear what listeners think. Until next time.