Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Stock Pledges for Pre-IPO Liquidity
Transcript
- Lucas: So you're a founder sitting on a hundred million dollars worth of common stock in a company about to go public. You don't want to sell because the IPO might pop, but you also need cash—maybe for a new house, a divorce settlement, or just diversification. What do you do? Luna: Traditionally you'd sell a chunk in a secondary, but that triggers a taxable event and dilutes your ownership. Lucas: Right, and you lose control. So a growing number of founders are using something simpler: a stock pledge. You take the shares you already own, put them up as collateral for a loan, and get liquidity without triggering a sale. The shares stay yours, the tax bill doesn't come until you eventually sell, and you keep your voting rights. Luna: It sounds like a margin loan but for pre ipo stock. Aren't there extra risks since the shares aren't publicly traded yet? Lucas: Absolutely. The lender—usually a private bank or a dedicated fund—will haircut the value significantly. They might lend only thirty to fifty percent of what they think the shares are worth, and they'll stress-test the valuation. If the company later IPOs at a lower price, or if the stock drops like we saw with Palantir recently—down thirteen percent in five days—the lender could issue a margin call. Luna: And if the founder can't cover the margin call, the lender can seize the shares. That's the nightmare scenario. Lucas: Exactly. But the upside is compelling. You get cash today, you don't pay capital gains, and you participate fully in any IPO pop. I've seen this structure used in a lot of the recent tech IPOs. For example, some Palantir employees used stock pledge loans back in 2020 before the direct listing—they could access millions in liquidity without selling a single share. Luna: There's also the estate planning angle, right? If the founder dies holding the shares, the heirs get a step-up in basis. But if they've sold, that benefit is gone. Lucas: That's a huge consideration. A stock pledge loan allows the founder to keep the shares in their estate, so the step-up still applies. The loan is just debt, not a sale. It's a pretty elegant way to bridge the gap between pre ipo wealth and post ipo liquidity. Luna: Who are the typical lenders for these pre ipo pledges? Lucas: Private banks like Goldman Sachs or JPMorgan have dedicated groups for ultra-high-net-worth clients. But there are also specialty funds that do nothing but lend against private stock. They'll do the due diligence on the company's financials, lock up the shares in a custody account, and charge interest usually around SOFR plus three to five hundred basis points. Luna: That's not cheap, but if the alternative is selling at a discount in a secondary or waiting years for a liquidity event, it can be worth it. Lucas: And the loan is non-recourse in many cases—meaning if the stock goes to zero, the lender keeps the shares and the founder walks away without personal liability. That's the ultimate downside protection. Luna: That's actually a better deal than a typical margin loan, which is recourse. So why don't more founders use this? Lucas: A few reasons. First, the loan agreement is complicated. You need to negotiate things like what happens if the IPO is delayed, whether you can pledge shares of a subsidiary, and how voting rights are handled. Second, some company charters restrict pledging—they don't want founders giving lenders control of shares in a default. And third, the loan interest is not tax-deductible unless the proceeds are used for investment purposes, not personal spending. Luna: So if you use the loan to buy a boat, you can't deduct the interest. If you use it to buy another startup, you might be able to. Lucas: Right. And there's also the branding risk. If a founder is rumoured to be pledging their shares, the market might interpret that as a sign of financial distress. So it's usually done very quietly. Luna: We're talking about this because we think it's a valuable tool for founders navigating the pre ipo phase. And just like that tool helps you keep more of your wealth, we choose to keep this podcast free of ads so you can get the information without interruption. Lucas: If these conversations are useful for what you're building or running, and you want to support that choice, the link is buy me a coffee dot com slash fexingo. No pressure, just an option for those who find value here. Luna: Yeah. It's a small gesture that keeps us going. And now back to the pledge structure—one nuance I want to dig into is the valuation mechanism. How do lenders actually value pre ipo shares? Lucas: Good question. They'll look at the most recent 409A valuation—that's the fair market value determined by an independent appraiser for tax purposes—but they'll also consider the last round's price, the company's revenue growth, and comparable public companies. They might apply a liquidity discount of twenty to thirty percent. So if the 409A says the shares are worth ten dollars, the lender might lend at seven dollars per share and then advance only fifty percent of that, so three fifty per share. Luna: That's conservative, but it protects them from downside. And the founder gets cash without a valuation event that the IRS would consider a taxable sale. Lucas: Exactly. The IRS has issued private letter rulings saying that a bona fide loan secured by stock is not a disposition, so no capital gains. But you need a real loan with a fixed repayment schedule and interest, not something that looks like a prepaid forward. Luna: And if the company goes public and the stock pops, the founder can either sell a portion to repay the loan or refinance at better terms. Lucas: Right. I've seen founders use the IPO pop to repay the loan entirely and still have a huge remaining stake. It's a beautiful outcome if it works. But the risk is that the stock drops and the lender demands more collateral. That's what happened to some founders in the 2022 downturn—they had to scramble to find additional shares or cash. Luna: So it's not for everyone. But for a founder with a high conviction in their company's trajectory and a need for current cash, it's a smart tool. Lucas: I think we'll see more of these as the IPO market picks up. With rates where they are—SOFR around five percent—the cost of borrowing is real, but the alternative of selling at a low valuation is worse. Luna: One last thing: What happens to the pledge if the company gets acquired instead of going public? Lucas: Usually the loan agreement will have a provision that the proceeds from the acquisition go first to repay the loan. So the founder still gets liquidity, just less than if they'd held the shares outright. But it's still a better outcome than a forced sale. Luna: Thanks Lucas. That was a great deep dive into a tool that's often overlooked. Lucas: Happy to cover it. For our listeners, if you're considering a stock pledge, talk to a good tax advisor and a lawyer who's done this before. The documentation matters.