Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Secondaries for Liquidity Before Exits
Transcript
- Lucas: You look at the market this week — Databricks is sitting on an 188-billion-dollar valuation, Dimension Capital just closed an 800-million-dollar fund — and you start to notice something. A lot of the liquidity happening isn't coming from IPOs or acquisitions. It's coming from structured secondary transactions. Luna: Right. Founders and early employees selling shares before the company actually goes public or gets bought. That's been a trend, but it feels like it's accelerating. Lucas: It is. And it makes sense when you look at the macro picture. The IPO window has been inconsistent — look at the last few months. You've got companies trading down after listing, and a lot of private companies are saying, why bother with the volatility of a public market debut when I can let my early stakeholders get some cash out privately? Luna: Especially when the public market is pricing in some uncertainty. The S&P 500 is up, but the ARK Innovation ETF is down more than 2 percent in the last week. That signals that high-growth, unprofitable tech isn't exactly in favor. Lucas: Exactly. So founders are turning to secondaries. The classic structure is a tender offer — the company facilitates a program where existing investors or a third-party buyer purchase shares from employees and founders. But the more interesting version is the structured secondary, where a dedicated secondary fund — like one of the new ones Dimension Capital is backing — comes in and buys a block of shares at a negotiated price. Luna: And those funds are getting bigger. Dimension's 800 million is earmarked for science and compute startups, but a portion is likely for secondaries. They want to build positions without waiting for an IPO. Lucas: Right. And the founders benefit because they get liquidity without the scrutiny of a public listing. No quarterly earnings pressure, no analyst calls. They can sell 10, 20 percent of their stake — sometimes more — and still retain control. Luna: But what about the tax hit? If a founder sells shares in a secondary, they're recognizing a gain, right? They can't defer it like they could in a tax-free exchange. Lucas: That's the trade-off. You can't do a 1031 exchange on stock. But there are ways to manage it — like using an installment sale structure or selling into a trust. The key is that the liquidity event is happening early, so the founder has cash to diversify or fund other ventures. Luna: And a lot of these deals are structured through special purpose vehicles — SPVs — where a group of buyers pools capital to purchase a block of shares. That way, the company doesn't have to deal with dozens of individual buyers. Lucas: Exactly. SPVs are becoming the vehicle of choice. You see funds like Forge Global or SharesPost organizing these. They handle the negotiation, the legal work, the compliance. The founder gets a check, the buyer gets shares at a discount to the last round's valuation, and the company stays private longer. Luna: It's interesting because a few years ago, secondaries were seen as a sign of distress — like the founder needed cash. Now it's almost expected. Especially for companies that have been private for eight, ten years. Lucas: Yeah, the stigma has totally flipped. If you're a founder at a unicorn and you haven't done a secondary, some investors might wonder why you're not taking some chips off the table. It's prudent financial planning. Luna: There's also the employee angle. Early engineers who joined at a 50 million valuation — they're sitting on paper wealth. A tender offer lets them buy a house or pay off student loans without waiting for an exit that might never come. Lucas: And that's actually one of the biggest drivers of these programs. Retention. If employees can get some liquidity, they're more likely to stay. Otherwise, they might leave for a public company where they can sell their RSUs right away. Lucas: Stripe did a big tender offer a couple of years ago. So did Databricks — they've done multiple. And now you see companies like Anthropic and OpenAI rumored to be exploring similar structures. Luna: Speaking of which — the Anthropic rumor this week about a potential investment from Physical Intelligence. That kind of deal could involve secondary components, right? Lucas: Absolutely. If Physical Intelligence is buying a stake, they might buy some from existing investors, some from employees. It's a hybrid. And those deals are getting more complex because you have crossover investors — like hedge funds — that want to build positions in private companies without waiting for an IPO. Luna: Right. And those hedge funds are often willing to pay a premium for large blocks. That's good for the seller. Lucas: But it also creates a two-tier market. The price in a secondary might be higher or lower than the last 409A valuation. It's a real price discovery mechanism. And that's useful for the company when they eventually do go public — they have a sense of what the market thinks they're worth. Luna: Of course, there are risks. If a secondary is priced too aggressively, it can set unrealistic expectations for the IPO. Or if too many shares are sold, it can dilute the incentive for future employees. Lucas: That's why most structured secondaries are capped — typically 10 to 15 percent of the fully diluted shares. And they're often done in conjunction with a new primary round, so the company still raises capital. Lucas: Another structure I'm seeing more of is the cross-purchase. That's where existing investors — like a venture firm — buy shares from early employees directly. The firm increases its ownership, the employee gets cash, and the company's cap table stays clean. Luna: That's efficient. No new shares issued, no dilution. And the VC gets a larger stake without writing a new check to the company. Lucas: Right. And it's becoming a standard feature in later-stage term sheets. Some VCs now reserve a pool specifically for secondaries. It's a way to build relationships with founders — you're helping them with personal liquidity, so they're more likely to work with you on the next round. Luna: It's a relationship business. And if listeners are founders thinking about this, what's the first step? Talk to your board, talk to your lawyers? Lucas: First step is understanding your current cap table and any lock-up provisions. Some early investors have right of first refusal. Then you need to decide on the structure — tender offer, cross-purchase, or SPV. Then find a buyer. There are dedicated secondary brokers now — like Nasdaq Private Market, Forge Global. They can run the process. Luna: And you want to time it right. If you do it too close to a potential IPO, the SEC might scrutinize it. Usually, companies wait at least six months after a secondary before filing. Lucas: Yeah, the SEC has been paying more attention. They want to make sure insiders aren't dumping shares before bad news. But if it's structured properly — with a 90-day lookback and no material non-public information — it's fine. Lucas: Look, we talk a lot about exits on this show. IPOs, acquisitions, SPACs. But for a lot of founders, the real liquidity event is the secondary. It lets them stay in the game longer, keep building, and still realize some of the value they've created. Luna: And it's a sign that the private markets are maturing. You don't need a public listing to get liquidity anymore. Lucas: Exactly. And if these conversations are useful for what you're building or running — we try to keep the show independent, no ads, no sponsors. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Every bit helps us keep digging into these topics. Lucas: So back to secondaries — I think the next frontier is the international secondary market. We're already seeing it in India, with companies like Flipkart and Byju's. And in Europe, with Klarna. As more unicorns stay private longer, the secondary market will only grow. Luna: And that means more liquidity options for founders globally. Which is a good thing for innovation. Lucas: Absolutely. Alright, that's all for today. Thanks for listening.