Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / Why Founders Are Cashing Out Via Secondaries Before Acquisitions
Transcript
- Luna: Lucas, we talk a lot about the big exit — the IPO, the acquisition at nine figures. But I keep hearing about founders who are cashing out before any of that happens. Lucas: Yeah, and it's not just a whisper anymore. Secondary share sales — where founders sell some of their personal stock to outside investors before a formal exit — they've become almost standard practice for late-stage startups. And for good reason: waiting for the IPO or acquisition can take years, and a lot can go wrong. Lucas: Look at the recent moves. Shopify's up 15 percent in the last five days. Rivian surged 14 and a half percent. The market is hungry for growth stories, but the window can slam shut quickly. Founders who've spent a decade building don't want to be the last one holding the bag when sentiment turns. Luna: So they're basically hedging their personal exposure. But doesn't that signal weakness to the board or potential acquirers? Like, 'our founder is bailing.' Lucas: That's the old thinking. Five years ago, an insider sale could spook investors. Now it's viewed as prudent wealth management. Especially when you structure it as a tender offer — a specific window where common shareholders can sell to a new investor at a fixed price. The company stays private, the founder gets liquidity, and no one panics. Luna: Before we go deeper — and this is very on point — a quick thing. These conversations about exit strategy, about timing the market, they're exactly why we do this show. If you're a founder or operator and these episodes help you think clearer about your own path, a couple of dollars a month genuinely keeps this going. Buy me a coffee dot com slash fexingo. No pressure, just — it's what lets us stay ad-free and focused on what actually works. Lucas: Absolutely. We hear from listeners who've used a specific framework from an episode to renegotiate a term sheet, and that's the whole point. So, back to secondaries — let's walk through a concrete example. Lucas: Say you're the founder of an AI infrastructure startup. You've raised four rounds, you're doing 50 million in ARR, growing 60 percent year-over-year. Your last valuation was 2 billion. But you've got 15 percent dilution. You own maybe 25 percent of the company. That's 500 million on paper — but it's all paper. Luna: Right. And you've got a mortgage, kids' college, maybe co-investor notes. So you hire a banker to run a secondary process. You sell, say, 5 percent of your stake — 25 million dollars — to a crossover fund that likes your growth story. Lucas: Exactly. And that fund — a firm like T. Rowe Price or Tiger Global — they get in at a slight discount to the last round, maybe 10 percent off. They do their diligence. They sign a side letter that says you can't sell more for 12 months. But you walk away with 25 million in cash, tax-efficient, no dilution of your remaining shares. Luna: And the company keeps operating. No change in control. No liquidity event that forces a new valuation. So when an acquirer comes knocking—say a big tech company looking at your AI stack—they see a founder who's already partially cashed out, which actually can make negotiation easier. Lucas: That's the counterintuitive part. A founder who's less desperate tends to negotiate better. They can walk away. And the acquirer knows that. So secondaries can strengthen your hand, not weaken it. Luna: Let's talk about the catch. If you sell secondary shares before an acquisition, you're leaving some upside on the table. If the company gets bought for 5 billion two years later, that 5 percent you sold at a 2 billion valuation would have been worth 250 million — not 25. Lucas: That's the trade-off. But the probability of a 5 billion exit is maybe 10 percent. The probability of failure is higher. Founders forget that their risk profile is already overweight in this one company. Selling secondaries is diversifying your personal balance sheet. It's not about betting against your company — it's about not betting your entire life on it. Luna: And there's a structural angle too. Some secondary transactions include a 'ratchet' or 'top-up' provision, where if the acquisition price is higher, the seller gets some of the difference. Have you seen those become common? Lucas: Not yet. I've seen a few boutique deals with earn-outs tied to secondaries, but most crossover funds want a clean buy-sell. They're not interested in giving upside participation. They want a fixed return based on the growth trajectory. So the founder has to decide: do I want liquidity certainty now, or a lottery ticket later? Luna: But if the market is hot — like we're seeing with Shopify and Rivian — doesn't it make sense to wait for the IPO? Those stocks have soared. Lucas: Only if you're the one selling at the IPO. But most founders are locked up for 180 days after listing. By then, the stock could be down 30 percent. Remember Palantir? It went public at a reference price of around 7 dollars, hit 39 dollars within months, then fell back to the teens. A founder selling secondaries at a 10 billion valuation pre ipo did better than one who waited to sell at the lockup expiry. Luna: So secondaries let you lock in a premium while the company is still private, before the public market volatility hits. Lucas: Exactly. And it's not just founders — early employees are increasingly using secondaries too. There are now platforms like Forge Global and EquityZen that facilitate these trades at scale. The SEC has even streamlined Rule 144 holding periods. It's becoming a parallel private market. Luna: I want to push back on one thing though. If too many founders sell secondaries, doesn't that signal a systemic risk? Like, if everyone is hedging, maybe the startup ecosystem's risk-reward model breaks. Lucas: That's a valid concern. But I'd argue it's more a sign of maturity. Venture capital used to be all-or-nothing. Now it's becoming more like private equity — where founders can take money off the table and still run the company. The real risk is moral hazard: if a founder sells a huge chunk and then loses motivation. But the data doesn't show that. Most founders who sell secondaries still hold 80 or 90 percent of their stake. They're just taking a little risk off. Luna: And what about the acquirer's perspective? If you're a big company looking to buy a startup, do you care if the founder has already cashed out? Lucas: Historically, some acquirers saw it as a red flag. But today, many don't. They're buying the team and the technology. If the founder has already taken some chips off the table, it means they're not desperate, which can lead to a more balanced negotiation. In fact, some acquirers prefer it because it means the founder won't drag out the process for a few more million. Luna: So if I'm a founder listening, what's the one concrete step I should take this week? Lucas: Talk to your board. Seriously. Many founders assume the board will say no, but most boards are open to a modest secondary — say 5 to 10 percent of the founder's stake — if the valuation is reasonable. Then find a banker who specializes in secondary placements, not just primary rounds. They'll run a process that doesn't disrupt the company. And finally, think about timing: if your company just raised a big round or hit a major milestone, that's the best moment to sell secondaries, because the story is fresh and confidence is high. Luna: Good advice. And for the employee side — if you're an early engineer with options, you probably can't sell secondaries without board approval. But you can ask. More companies are opening up windows for employees too. Lucas: That's a great point. And it ties back to what we said at the top: the secondary market is becoming a legitimate liquidity tool, not a backdoor. It's part of a founder's toolkit now, right alongside the IPO and the acquisition. Luna: I think the big takeaway is: don't wait for the perfect exit. Create your own liquidity event along the way. Lucas: Exactly. And next episode, we'll look at how some founders are using structured loans against their stock — basically borrowing against their paper wealth before they sell. It's the next frontier. Luna: I'm curious about that. But for now, Lucas, thanks for walking us through this. Lucas: Always a pleasure.