Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Structure Pre-IPO Loans Against Their Shares
Transcript
- Lucas: Let's talk about something that more and more founders are doing quietly — taking out personal loans against their own pre ipo shares instead of selling them. Luna: You mean like borrowing against stock that isn't even public yet? How does that even work? Lucas: It's a fast-growing corner of private wealth management. The basic idea: a founder holds millions of dollars in private company stock — say, SpaceX, which as of this week is valued at roughly two point six trillion dollars, briefly passing Amazon in market cap. Luna: Right, I saw that headline. Wild. Lucas: The founder doesn't want to sell because they believe the stock will go higher post ipo. But they also want cash now — for a new house, a venture fund, or just diversification. So a bank or a specialty lender offers them a loan, typically at a loan to value ratio of 25 to 50 percent, secured by those private shares. Luna: So if the shares are worth ten million, the founder might borrow two to five million. At what interest rate? Lucas: Rates vary widely — typically SOFR plus 300 to 500 basis points, so in this rate environment, call it 8 to 10 percent annualized. But the key structural point is that these loans are often non-recourse, meaning the lender can only go after the collateral — the shares — not the founder's other assets. Luna: That seems like a huge advantage over a regular margin loan. If the stock drops, you just walk away? Lucas: Exactly. But there's a catch. If the stock price falls below a certain threshold — say 30 percent below the valuation at loan origination — the lender can demand more collateral or force a sale. And in a private company, valuing those shares is tricky. Luna: So how do lenders price the risk? They can't just look at a ticker. Lucas: They rely on the latest 409A valuation, which is an independent appraisal of the company's fair market value. But 409A valuations can lag by months. A company like SpaceX might see its valuation jump from 180 billion to 2.6 trillion over a couple of years — but the 409A might only update quarterly. So the lender builds in a huge margin of safety. Luna: That explains the 25 to 50 percent loan to value. They're protecting themselves against the valuation being stale. Lucas: Exactly. And the founder benefits too — they avoid triggering a taxable event. Selling shares would mean capital gains tax, potentially 20 to 30 percent depending on the jurisdiction. A loan is not income, so it's tax-free at the point of borrowing. Luna: But you still have to pay it back. What happens at the IPO? Lucas: When the company goes public, and the lockup expires — typically 180 days — the founder can sell a portion of their shares to repay the loan. Or they can roll the loan into a traditional margin loan against the now-public stock. Some lenders even structure it so the loan automatically converts at IPO. Luna: What if the IPO doesn't happen? Or gets delayed? Lucas: That's the risk. If the IPO is delayed, the founder is stuck paying interest on a loan with no clear exit. And if the company's valuation drops, the lender might call the loan. There's a famous cautionary tale from the 2022 downturn — a founder at a once-hot fintech had to give up nearly all their shares when the valuation cratered. Luna: So it's a bet on timing and continued growth. Lucas: Right. But for founders at companies like SpaceX, Stripe, or Databricks — which have long been called 'IPO candidates' but haven't gone public yet — these loans are becoming standard. SpaceX alone has raised billions in private funding, and many early employees and founders have used loan facilities to get liquidity without selling. Luna: Let's talk about the mechanics for a minute. How does the lender actually hold the collateral? They can't exactly take physical possession of shares in a private company. Lucas: They hold the shares through a custodial arrangement. The founder transfers the shares to a special purpose vehicle or a trust controlled by the lender. The founder retains voting rights in many cases, but the lender has a perfected security interest. If the loan defaults, the lender becomes the owner. Luna: So the founder loses control too, not just the economic value. Lucas: That's a big consideration. Founders who are still actively running the company may not want to give up voting shares. Some lenders structure it so that only non-voting shares are pledged — but not all companies have that class structure. Luna: What about the interest payments? Are they due monthly, or can they be capitalized? Lucas: Most of these loans allow interest to be paid in kind — PIK interest — meaning the interest accrues and is added to the principal. So the founder doesn't need to come up with cash every month. But the total loan balance grows over time, which can eat into the eventual sale proceeds. Luna: So you could borrow five million, and three years later owe seven million if the interest is compounding. Lucas: That's the trade-off. Now, there's another structure worth mentioning: the prepaid variable forward contract. It's a derivative where the founder agrees to sell a certain number of shares at a future date but receives cash upfront. It's structured as a loan for tax purposes but is technically a forward sale. Luna: I've heard those called 'collar strategies' — where you cap the upside and downside. Lucas: Exactly. The founder sets a floor and a ceiling on the stock price. If the stock goes above the ceiling, the lender gets the excess. If it goes below the floor, the lender absorbs the loss. The founder gets a fixed amount today, and if the stock stays within the collar, they keep some of the upside. It's more complex, but it's popular for very large positions. Luna: Who are the big lenders in this space? I know Goldman Sachs and Morgan Stanley have private wealth divisions that do this. Lucas: The big banks — JPMorgan, Goldman, Morgan Stanley — but also specialty firms like Silicon Valley Bank, now part of First Citizens, and newer players like Forge Global or EquityBee that facilitate secondary sales and loans. There's also a growing number of family offices that offer these loans at competitive rates. Luna: And what about the SEC? Are there any disclosure requirements? Lucas: For private companies, there's generally no public disclosure. But if the founder is an officer or director of a public company, they have to report pledging of shares under SEC rules. For pre ipo, it remains private — unless the loan is part of a larger financing round that gets reported. Luna: So there's a lot of opacity. Which means we only hear about the deals that go wrong. Lucas: Or the ones that are massive enough to leak. Remember when Elon Musk pledged Tesla shares for personal loans? That was disclosed because Tesla was public. For private SpaceX, we don't know the details, but given the valuation ballooning to two point six trillion, you can bet there are large loans outstanding. Luna: I want to zoom out. For a founder listening who's considering this, what's the key takeaway? Lucas: First, understand the loan to value ratio — don't borrow more than you can afford to lose if the valuation drops. Second, read the fine print on margin calls and non-recourse clauses. Third, think about the tax implications: you're deferring tax, not avoiding it. And fourth, consider the alternative: a secondary sale of a small portion of shares, which gives you cash with no debt. Luna: Speaking of alternatives, earlier this year we saw a lot of founders using tender offers for early liquidity. How do loans compare? Lucas: Tender offers are great because you get cash and there's no debt. But you have to sell shares, which means you give up future upside. A loan lets you keep the upside, but you carry the risk of a margin call. It really depends on the founder's conviction about the company's future. Luna: And their risk tolerance. Leverage amplifies both gains and losses. Lucas: Exactly. And we haven't even talked about the scenario where the company's IPO is delayed indefinitely. Some companies have been 'pre ipo' for five, ten years. The interest on a loan can snowball. Luna: But if the company does go public at a higher valuation, the loan looks genius. Lucas: It's a bet. And like any bet, you should only risk what you're comfortable losing. For founders sitting on billions in paper wealth, losing a few million in a loan might be acceptable. For a first-time founder with a few million in equity, it's a much bigger gamble. Luna: So what's the trend? Are more founders doing this now than, say, five years ago? Lucas: Absolutely. Private credit markets have exploded. According to a recent report from PitchBook, the amount of loans collateralized by private company stock grew by about 40 percent year-over-year in 2025. More lenders are entering the space, and the structures are becoming standardized. Luna: It's almost like a parallel banking system for the ultra-wealthy. Lucas: Exactly. And it's not just founders — early employees with large option grants are also using these loans. The minimum loan size is usually around one million dollars, so it's still for people with significant wealth. Luna: So if you're a founder with, say, ten million in equity but no cash flow, this could be a lifeline. Lucas: Or a trap, depending on the terms. That's why it's crucial to work with an experienced advisor. Don't just take the first offer from a bank. Compare rates, loan to value, and the recourse provisions. Luna: Yeah, shopping around makes sense. And I imagine the negotiation power depends on the quality of the collateral — SpaceX shares are probably more attractive than a Series A startup. Lucas: Exactly. Lenders have their own internal scoring models. A company like SpaceX, with a clear path to revenue and a huge valuation, is prime collateral. A biotech startup with no product yet — much harder to borrow against. Luna: This has been really eye-opening. So in summary: pre ipo loans are a powerful tool, but they come with real risks. Know what you're signing up for. Lucas: One last thing — if you've gotten value from these conversations, they're only possible because of listener support. A couple of dollars a month genuinely keeps us ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. We'll be back tomorrow with another angle. Luna: Yeah, it really does make a difference. Thanks for being part of this. Lucas: Alright, tomorrow we'll look at how founders are using exchange funds to diversify without triggering taxes — another creative liquidity strategy that's gaining traction.