Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Secondary Direct Listings for Liquidity
Transcript
- Lucas: So there’s a liquidity strategy that’s been quietly growing in popularity among late-stage founders, and it’s not an IPO, not a direct listing, and not a SPAC. It’s called a secondary direct listing, and I think it’s worth paying attention to because it solves a really specific problem for founders who want partial liquidity without the baggage of a full public debut. Luna: Secondary direct listing — say that five times fast. But what does it actually mean? I know the standard direct listing, where a company lists existing shares on an exchange without raising new capital, but ‘secondary’ adds another twist. Lucas: Right. Traditional direct listings — like Spotify or Slack — let existing shareholders sell shares on day one, but the company still has to go through the full SEC registration and exchange listing process. A secondary direct listing happens on a private exchange, like NASDAQ Private Market or Forge Global. The company doesn’t list on a public exchange. Instead, it runs a one-time auction where pre-approved institutional buyers bid on a block of shares from existing holders. Luna: So it’s like a private secondary sale, but structured more like a mini ipo. Why would a founder choose that over a traditional secondary round with venture investors? Lucas: Control. In a typical secondary round, you’re selling to other private investors — maybe a crossover fund or a sovereign wealth fund — and you negotiate one-on-one. With a secondary direct listing, you open it up to a broader pool of institutional buyers through an auction. The company sets a floor price, buyers bid up, and the final price is market-clearing. You get price discovery that’s closer to what a public listing would give you, but without the ongoing compliance burden of being a public company. Luna: Who’s done this recently? I feel like I’ve seen headlines but nothing I can quite put my finger on. Lucas: A great case is Rippling. The HR and payroll platform, founded by Parker Conrad. In late 2025, Rippling ran a secondary direct listing on NASDAQ Private Market, offering shares from early employees and some early investors. The company didn’t raise any new capital — it was purely a liquidity event for existing holders. The deal was oversubscribed, meaning more buyers wanted in than shares available, and the price ended up above the floor. It was a clean, efficient exit for a subset of stakeholders. Luna: Interesting. And it let Rippling stay private longer. They didn’t have to deal with quarterly earnings calls or analyst scrutiny. But does that mean the founders and early employees who sold got a worse price than they would have in an IPO? Lucas: That’s the trade-off. In an IPO, you often get a pop on day one — underpricing is built into the system. In a secondary direct listing, because you’re selling on a private exchange, the buyers are sophisticated institutions. They’re not going to overpay. So the pricing is efficient, but you don’t get that irrational exuberance that sometimes happens in a hot IPO. What you do get is certainty and speed. The whole process can take weeks, not months. Luna: And no lockup! That’s a huge deal for founders who are tired of waiting six months after an IPO to touch their money. In a secondary direct listing, they get cash immediately. Lucas: Exactly. That was a big motivator for Rippling’s early employees who had been holding stock for years. Parker Conrad himself didn’t sell in that tranche — he’s still holding — but the message to talent was clear: we can give you liquidity without forcing a full IPO. That’s a powerful recruiting tool. Luna: It also reflects the broader market environment. Mid-2026, the IPO market is lukewarm. Venture-backed companies are staying private longer. The VIX is elevated, tech stocks are choppy — look at Tesla down 3.5 percent in the last five days. That’s not a friendly backdrop for a traditional IPO. So founders are getting creative. Lucas: Right. And it’s not just Rippling. We’ve seen companies like Stripe and Databricks explore similar structures, though they’ve used different mechanisms — tender offers, structured secondaries. The secondary direct listing is a distinct flavor because it’s a one-time auction with a public price discovery mechanism, but without the public listing. Luna: One risk I can see: if the auction clears at a price that’s significantly below the last private round valuation, that’s a down round signal. Could that damage morale or future fundraising? Lucas: Absolutely. That’s the hardest part. The company has to set a floor price that’s high enough to avoid a down round stigma but low enough to attract buyers. Rippling reportedly set its floor at a slight discount to its last primary round valuation — I think around 10 percent below — and the auction cleared above that. So it was effectively a flat round. That’s a delicate calibration. Luna: And you need a critical mass of institutional buyers who know the company and are willing to bid. That’s easier for a Rippling or a Stripe than for a lesser-known startup. This is not for everyone. Lucas: No. It’s for companies that are already on the radar of large asset managers. But the structure is flexible. You can do it with a single block of shares or multiple blocks. You can let only certain classes of shareholders participate. And you can run it on a private exchange without triggering SEC registration because you’re not listing on a national exchange. It sits in this regulatory gray zone that the SEC has mostly tolerated. Luna: Speaking of regulation, do you think the SEC will eventually crack down on this? It feels like a way to bypass public company transparency rules while still giving large investors liquidity. Lucas: It’s possible. The SEC has been looking at private markets more closely. But for now, these transactions are treated as exempt offerings under Regulation D or Rule 144A. As long as you’re selling to accredited investors and not doing a general solicitation, it’s fine. The risk is if these become so widespread that they undermine the public markets. But we’re not there yet. Luna: It’s a fascinating evolution. For a founder who wants liquidity but doesn’t want to be a public CEO, it’s a middle path. You get some cash out, you test market appetite, and you keep your options open. Lucas: Exactly. And it’s another tool in the kit. We’ve talked about traditional IPOs, SPACs, direct listings, tender offers, earnouts — this is just one more option. The best founders are the ones who understand all the levers and choose the right one for their specific situation. Luna: I want to come back to Rippling for a second. They did this in late 2025. They’re still private. Do you think they’ll eventually do a full IPO, or will they keep doing these secondary listings indefinitely? Lucas: That’s the million-dollar question. Parker Conrad has said he’s in no rush. Rippling is growing fast — expanding into new products like spend management and device management — and they don’t need the capital. A secondary direct listing every 12 to 18 months could become a regular liquidity event for employees and early investors. That would be a real shift from the traditional venture model where the only exit is an acquisition or IPO. Luna: It’s almost like a private company with public-market liquidity. I wonder if we’ll see a world where big private companies — the Stripe, the SpaceX, the Databricks — never go public but still provide regular liquidity through these mechanisms. Lucas: That’s the direction some people predict. The number of public companies has been declining for decades. Private markets are deeper and more efficient than ever. If founders can give their employees liquidity and investors an exit without the hassle of being public, why would they ever go public? The counterargument is that public markets offer a deeper pool of capital and a currency for acquisitions. But for now, the trend is toward staying private longer. Luna: Let’s take a quick step back. You know, we do these deep dives every week on startup exits, and the reason we can is because of a small group of listeners who support the show directly. It’s ad-free, no sponsors, just the content. If you find these conversations useful for what you’re building or running, you can join that group at buy me a coffee dot com slash fexingo. It’s a couple of bucks a month, and it literally keeps the lights on for a podcast like this. We appreciate it. Lucas: Absolutely. And it lets us cover these niche topics without worrying about pleasing advertisers. So if you’re one of those supporters, thank you. Now, back to secondary direct listings — I want to give a concrete example of how the auction mechanics work. Lucas: Let’s say a founder wants to sell 1 million shares. They work with a private exchange like the NASDAQ Private Market. They set a floor price — say $50. Then they send a confidential offering document to a curated list of institutional buyers. Those buyers submit bids indicating how many shares they want at what price. The exchange runs an algorithm to clear the market. If total demand exceeds supply at a price above the floor, the final price is set at the last price that clears all shares. Everyone pays that same price. Luna: So it’s a uniform price auction, not a discriminatory one. That’s good for simplicity. And the founder gets a single price that reflects true demand. Lucas: Exactly. And the transaction settles within a week or so. The buyer gets the shares, the seller gets cash, and the company’s cap table is updated. No ongoing reporting, no continuous market making. It’s a one-time event. Luna: But there’s a secondary market risk here. If a founder sells a chunk of their stake, and then the company’s performance sours, they’ve already taken money off the table. That’s fine for them, but it can create misaligned incentives. Do investors worry about that? Lucas: They do, which is why many secondary direct listings include a requirement that the founders retain a certain percentage of their holdings. In Rippling’s case, Parker Conrad didn’t sell, which set a good example. But if the CEO sells a big chunk, it can signal a lack of confidence. So the structuring has to be thoughtful. Sometimes the selling group is limited to early employees and non-founder investors. Luna: And the company doesn’t get any cash from the sale. That’s another downside. If you’re a growth-stage company that needs capital, a secondary direct listing doesn’t help. You’d need a primary round alongside it, or a separate capital raise. Lucas: Right. It’s purely a liquidity event, not a fundraising event. That’s why you see companies pair it with a primary round sometimes. But for a company like Rippling that’s already well-capitalized, it’s fine. They don’t need the money. They just want to give their shareholders an exit. Luna: Let’s talk about the fees. What does it cost to run one of these? Lucas: The private exchanges charge a fee, typically a percentage of the transaction value. It’s not cheap — maybe 1 to 3 percent, but that’s still less than the underwriting fees for an IPO, which can be 5 to 7 percent. And you avoid the legal and accounting costs of a full IPO. So overall, it’s cheaper and faster. Luna: And the reputational cost is lower. If an IPO bombs, it’s public. If a secondary direct listing clears at a lower price, it’s still private. The company can control the narrative. Lucas: That’s a big advantage. You can test the waters without the scrutiny of CNBC analysts. And if the auction doesn’t clear at a satisfactory price, you can cancel it and try again later. No one has to know. Luna: So final question: is this the future of founder liquidity, or a niche that only a few companies will use? Lucas: I think it will grow, but it won’t replace IPOs. For huge companies that need to raise hundreds of millions of dollars, a public listing is still the best route. But for the mid-tier unicorns — say $2 to $10 billion valuation — that don’t need capital and want to give employees liquidity, secondary direct listings are a compelling option. We’re going to see more of them. Luna: And it’s another reminder that founder exit strategy is no longer a one-size-fits-all decision. There are more tools than ever. Thanks for breaking this one down, Lucas. Lucas: Glad to. Next time we’ll look at another creative exit structure — maybe the ‘staged IPO’ where a company lists a small percentage of shares first to establish a market price. But that’s for another episode.