Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Structured Liquidity Tiers to Price IPO
Transcript
- Lucas: Let me start with a number: yesterday, SambaNova, the AI chip maker, raised a billion dollars at an eleven billion dollar valuation — their second mega round in five months. Luna: Right, I saw that. And the obvious question: how do they keep finding buyers at higher prices each time? Lucas: Exactly. And that is actually the perfect entry point for today's topic. Because the mechanism that lets founders test demand before a public offering is something called structured liquidity tiers. Luna: Structured liquidity tiers — is that just a fancy term for selling shares in batches? Lucas: Sort of, but with a specific purpose: price discovery. Instead of one big secondary sale or one uniform IPO price, the company creates multiple tiers — typically three — and lets different groups of investors participate at different times and different prices. Luna: So who is in each tier? Lucas: The lowest tier — the floor — is usually for early employees and angel investors. They get a guaranteed price, often a discount to what the company thinks the IPO will price at, in exchange for agreeing to a longer lockup. The middle tier is for late-stage VCs and existing institutional investors — they get a market-clearing price that is set by a mini-auction. And the top tier is for new crossover investors — mutual funds, sovereign wealth funds — who pay a premium for the right to buy into the IPO allocation. Luna: So the top tier is basically a signal to the underwriters: if these sophisticated buyers are willing to pay, say, twenty percent above the floor price, that tells you the real demand is strong. Lucas: Bingo. And the underwriters — Goldman, Morgan Stanley, whoever is leading the IPO — use the order book from each tier to triangulate the final IPO range. If the top tier is oversubscribed three times, the range goes up. If the floor tier is undersubscribed, they know the price is too aggressive. Luna: Does this replace the traditional roadshow, or is it additive? Lucas: It's additive. The roadshow still happens, but it becomes more of a confirmation exercise. The real price discovery happens in these tiers, often weeks before the official filing. It also solves a coordination problem: founders want to sell some shares, employees want liquidity, and VCs want to exit — but they all have different time horizons and price expectations. The tiers let each group transact at a price that works for them. Luna: I can see why founders like this. But what about retail investors? They don't get access to any of these tiers. They only get the IPO price, which might already be inflated by the top-tier premium. Lucas: That is a real criticism. And some investor advocates argue that structured tiers create a two-tiered market — insiders get better prices and more information. However, the counterargument is that the IPO price itself is more accurate because of the data from the tiers. Without them, the underwriter is basically guessing based on roadshow meetings. With them, you have actual money committed at multiple levels. Luna: So it reduces the odds of a massive first-day pop — or a flop — because the price is already tested. Lucas: Exactly. And we have seen this structure used by several late-stage unicorns in the past eighteen months — especially in the AI space, where valuations are moving fast and the window for IPO pricing is narrow. SambaNova is a good example because they raised two rounds in five months. Their valuation went from maybe eight billion to eleven billion. That kind of rapid step-up is exactly the scenario where structured tiers help: you need to figure out which price the market actually believes. Luna: Are there any downsides for the founder personally? I imagine the structure creates complexity in terms of who gets to sell and when. Lucas: Definitely. The founder has to negotiate separate agreements for each tier — lockup periods, vesting acceleration, right of first refusal. And if the top tier demands a premium, the founder might be pressured to sell less of their own shares to keep the allocation for new investors. So they end up with less liquidity than they hoped. But the trade-off is they get a more stable IPO process. Luna: And a more predictable outcome for employees, who are often the most anxious about the exit. Lucas: Right. The floor tier gives employees a guaranteed exit price, which can be a huge morale boost. They are not waiting for the market to decide on IPO day. And the company can use that floor price as a benchmark for internal equity planning. Luna: So if you are a founder listening, how do you actually set up these tiers? Is it something you do six months before the IPO, or earlier? Lucas: Typically, you start about six to nine months out. You work with your lead underwriter and your legal counsel to define the tiers — how many shares go into each, what the price mechanism is, and what the lockup terms are. Then you run a confidential process — you approach potential investors in each tier and gauge interest. The feedback from that process shapes the S-1 filing. Luna: And if the feedback is weak in the top tier, you might delay the IPO or lower the range. Lucas: Exactly. It is a pressure test without the public scrutiny. And that is why I think we will see more of this structure, especially as companies stay private longer and accumulate multiple layers of investors with different cost bases. Luna: It makes sense. And you mentioned earlier that this is especially relevant for fast-moving sectors like AI. Given what we are seeing with SambaNova, and also with companies like Anthropic and others, do you think structured tiers will become the default for large tech IPOs? Lucas: I think so. The traditional book-building process is over a hundred years old. It relies on the underwriter having a gut feel for demand. Structured tiers add data — actual committed capital at multiple price points. For companies with complex capital structures, that data is invaluable. Luna: And for listeners who are building companies or investing in them, this is one of those tools that can make the difference between a chaotic IPO and a smooth one. Lucas: Absolutely. And speaking of tools that help founders and operators — that is actually what we try to do on this show. We keep it ad-free because we think this kind of specific, practical knowledge should be accessible without interruption. Luna: Yeah, we don't run ads, and that's deliberate. If you find these episodes useful for what you are building or running, and you want to support the ad-free approach, you can find us at buy me a coffee dot com slash fexingo. Lucas: It is a small way to keep the show independent and focused on the details that matter. Now, back to the tiers — one more nuance I want to mention: the lockup structure in each tier can vary. The floor tier might have a six-month lockup, the middle tier twelve months, and the top tier maybe eighteen months. That sequencing is designed to prevent a flood of shares hitting the market at once. Luna: So the top-tier investors, who pay the highest price, are also the ones who have to wait the longest to sell. That aligns incentives — they are long-term believers. Lucas: Exactly. And the founder can use that to signal confidence: if the founder puts their own shares in the top tier, it tells the market they are not just cashing out. Luna: Right. So structured tiers are not just a pricing tool — they are a communication tool. Lucas: That is the perfect way to put it. And given the market we are in right now — where volatility is high and IPO windows open and close quickly — having that communication channel built in is a real advantage. Luna: Alright, next time we will talk about another mechanism founders use to control their exit. Until then, thanks for listening. Lucas: Take care.