Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Secondary Sales to Cash Out Before IPOs
Transcript
- Lucas: So Suno, the AI music generator that's still fighting copyright lawsuits, just raised another 400 million dollars. And the headline number is impressive, but what caught my eye is that a chunk of that round was structured as a secondary sale — meaning existing shareholders, likely founders and early employees, got to cash out some of their equity. Luna: That's interesting. So it's not all new money going into the company — some of it is liquidity for insiders. Lucas: Exactly. And Suno is not alone. We're seeing this more and more, especially in AI startups where valuations have skyrocketed but there's no clear near-term exit. Founders are sitting on massive paper wealth that they can't touch, so they're using secondary sales to de-risk personally. Luna: Yeah, I mean, look at the market today — the NASDAQ is choppy, growth stocks like Amazon and Alphabet are down. The IPO window isn't exactly wide open. Lucas: Right. Amazon down over 9 percent in the last five days, Alphabet down over 7. That makes it harder for a company like Suno to go public on their own timeline. So secondaries become a way to give founders some liquidity without waiting for an IPO or acquisition. Luna: How does a secondary sale work in practice? I mean, is it just the company buying back shares, or are new investors buying from founders? Lucas: It's typically the latter. In Suno's case, the new investor — or sometimes existing investors — buy shares directly from founders and employees. The company itself doesn't get the cash; it's a transfer of existing shares. The round might also include some primary capital for the company, but the secondary component is specifically for liquidity. Luna: So the company's valuation goes up, but the cash doesn't go into the business. That seems like a win for the founders, but what about the new investor? Why would they want to buy secondary shares? Lucas: Good question. The new investor gets a stake in a hot company without diluting the existing cap table. And sometimes they can negotiate a slightly better price because the seller is motivated. For a firm that really wants exposure to an AI music company with fast-growing revenue, buying secondary shares might be the only way in. Luna: Makes sense. But doesn't this create a misalignment? If founders are cashing out, does that reduce their incentive to build for the long term? Lucas: That's the classic concern. And some venture investors do push back on large secondaries. But the counterargument is that founders who have all their net worth tied up in one illiquid stock might make conservative decisions. They might avoid risky bets because they can't afford to lose everything. A partial cash-out can actually free them to think long term. Luna: So it's like diversifying your personal portfolio without leaving the company. Lucas: Exactly. And there's precedent. Look at Rivian — the stock jumped almost 20 percent in the last five days. That kind of volatility is hard for founders to stomach when their entire net worth is in the stock. Secondaries let them take some chips off the table. Luna: But Rivian is public. Founders there can sell on the open market, with restrictions. For private companies like Suno, the only way to sell is through a structured secondary. Lucas: Right. And that's why we're seeing more of these deals in private markets. Data from firms like Forge Global and EquityZen shows secondary transaction volumes have been climbing, especially for AI companies. It's become a standard part of the fundraising playbook. Luna: So what does this mean for the typical startup employee? If founders are selling, does that trickle down? Lucas: It can, but it's not automatic. In many secondaries, the selling shareholders are specifically founders and early investors. Employees often have to wait for a tender offer or a formal liquidity program. But some companies, like Stripe and SpaceX, have offered periodic tender offers that let employees sell a portion of their shares. Luna: So Suno's 400 million round — do we know how much was secondary versus primary? Lucas: The details haven't been fully disclosed, but reports suggest a meaningful secondary component. And that's typical for rounds of this size. Investors want to support the company, but they also want to lock in relationships with founders by providing personal liquidity. Luna: It feels like the definition of a 'fundraising round' is shifting. It's not just about capital for growth; it's about wealth management for founders. Lucas: Absolutely. And that shift has implications for how we think about startup valuations. If a significant part of a round is secondary, the implied valuation might be a bit fuzzy. The price per share might be the same, but the company isn't getting all that cash. Luna: So investors should adjust how they look at the valuation multiple, right? Because the enterprise isn't receiving the full amount. Lucas: Exactly. If you're looking at a company valued at 3 billion on a 400 million raise, but 200 million of that is secondary, the company only gets 200 million. The effective valuation for the company's cash needs is different. Luna: That's a nuance a lot of casual observers miss. They see the headline valuation and assume the company got all that money. Lucas: Right. And it's not just Suno. We're seeing it across the board. In fact, I'd argue that secondary sales are becoming a proxy for founder confidence. If a founder sells a small percentage, it's diversification. If they sell a large chunk, it might signal they think the upside is capped. Luna: That's a good point. And it ties back to the broader market environment. With interest rates still elevated and the IPO window shaky, founders are thinking about liquidity now rather than waiting. Lucas: You know, speaking of useful conversations — if this sort of analysis is helpful for what you're building or running, I want to mention that these episodes stay ad-free thanks to listener support. If you found today valuable, you can buy me a coffee at buy me a coffee dot com slash fexingo. That's all one word, fexingo. It helps us keep doing deep dives like this without commercial breaks. Luna: Yeah, it's a simple way to support the show. And we really appreciate it. Now, back to Suno — do we know when they might actually go public? Lucas: Not yet, but the secondary sale suggests they're not in a rush. They've given founders some liquidity, so the pressure to IPO is lower. That could mean they wait for a better market window or until they hit certain revenue milestones. Luna: So secondaries effectively buy time. That seems like a smart move in this environment. Lucas: It does. And I think we'll see more of it. As long as private valuations stay high and public markets stay uncertain, founders will keep looking for ways to cash out a little without losing control. Luna: And investors will keep facilitating it, because getting a piece of a hot company — even at a slight discount — is better than missing out entirely. Lucas: Exactly. So the next time you see a massive funding round, look past the headline. Ask how much is actually going to the company, and how much is going to the founders' bank accounts. That tells you a lot about the real story. Luna: Well put. Thanks, Lucas. Lucas: Thanks, Luna. That's it for today's episode of The Startup Exit Podcast. We'll be back tomorrow with another angle on founder liquidity.