Ways to Unlock Startup Equity Before IPO

A few more hard earned lessons about early exercise of options and QSBS (Qualified Small Business Stock) for early stage startup employees, as follow up to my last post ➤ Early exercise is a huge benefit for early startup employees as it helps a lot with taxes and unlocks the QSBS benefit. You purchase both vested and unvested shares upfront. If you leave before all your shares vest, the unvested portion is repurchased by the company at your original strike price. ➤ Long-term capital gains rates: with early exercise you start the long term capital gains clock. ➤ Eliminates the spread problem: the delta between strike price and FMV (Fair Market Value) at the time of exercise. If your strike price is $1 but the FMV is $10 at the time of exercise, you still only pay $1 per share but the $9 of spread is added as an adjustment in the calculation of the Alternative Minimum Tax (AMT). ➤ The problem of spread can be exacerbated by a 90-day exercise window (you have 90 days to exercise your options after leaving the company) as you might be in a situation where are subject to AMT for illiquid stock. Early exercises eliminates this problem 💡 The main reason to not exercise early is the risk of losing the money but if you don’t believe in the company to use the early exercise benefit maybe you should not be there ➤ From options to QSBS: founders and investors purchase their shares directly from the company so their stock is QSBS. Employees, need to exercise their options while the the corporation is QSB. The company must allow early exercise or they vest and exercise some options before the $50M asset line has been crossed ➤ Your shares qualify as QSBS is you buy them directly from a domestic C-corporation with gross assets of $50M or less at the time of stock issuance (practically means to have raised less than $50M) ➤ $10M exclusion: The main benefit of QSBS is the exclusion of up to $10M in gains (or 10x your basis if it's more) from federal taxes. ➤ 5-Year holding requirement: to unlock the tax benefits ($10M tax exclusion), you must hold the stock for at least five years 💡 Gifted shares maintain the QSBS eligibility. That combined with the fact that the exclusion is per tax entity it means that if you gift QSBS shares to your parents or kids trust funds, etc. they get their own exclusion 💡 In an acquisition, if stock gets involved, that is usually organized as a tax-free stock exchanged. The acquirer stock you get in exchange for your QSBS inherits the benefits. This is important if at the time of the acquisition the 5 year requirement was not yet satisfied at the time of the transaction ➤ Rollover of QSBS: in certain situations, you can roll over your QSBS gains into another QSBS-eligible investment, deferring taxes. For example, when investing at a startup after selling your QSBS All this only matters upon success but it's an important benefit to early employees

There are many funding options beyond raising equity capital (my career actually started in helping companies access non-dilutive funding). When I’m building the funding strategy for founders from scratch, we map out all their liquidity options (not just the obvious ones). Here’s what I’ve seen work for private companies at different stages: 1 - Periodic liquidity mechanisms. There are a few emerging platforms I’m excited about here, which are changing the game for private companies. They offer intermittent trading windows that let early investors and employees access liquidity without forcing an IPO or acquisition. This is massive for retention and cap table management. 2 - Revenue-based financing. For companies with strong recurring revenue, RBF provides capital without equity dilution. Repayments can also adjust to your sales topline, making cash flow management far less painful. 3 - Asset-based lending. If you’ve got inventory, receivables, or equipment on your balance sheet, you can unlock capital against those assets. I’ve seen a lot of founders use it for bridging funding rounds. 4 - Non-dilutive grants. Government programs (such as Innovate UK) and corporate innovation funds provide capital that doesn’t ask for any equity stake. Underutilised,and incredibly valuable for R&D-heavy businesses. Most popular at Pre Seed. 5 - Strategic debt/ venture debt. For companies that have already raised equity and need working capital without further dilution, venture debt can be a tactical bridge to the next milestone. Most often used at Series A & above. Mixing all of the above in addition to raising equity capital can build your solid funding journey from Pre Seed all the way to an IPO. #capitalraising #startupfunding #fundingoptions

The path to IPO isn't what it used to be. Today's companies are staying private longer, creating a new challenge: how to reward the employees and early investors who power their engine of growth? The answer is the secondary market. Recent headlines, like OpenAI's reported talks of a secondary share sale, are powerful examples of this shift. Companies are strategically using secondary sales to provide essential liquidity without the pressure of going public. This approach is a win-win-win: Talent Retention 🏆: It allows valuable employees to realize value of their hard-earned equity in a tangible way, boosting morale and loyalty. Investor Satisfaction 🤝: Early backers can de-risk and lock in returns from their long-term bet on the company. Controlled Growth 📈: Companies can manage their cap table and bring in strategic, long-term partners on their own terms. Providing liquidity is no longer just an exit strategy, it's a core part of the growth journey for today's most ambitious private companies. #PrivateEquity #VentureCapital #Secondaries #StartupLife #EmployeeEquity #Liquidity

Equity Grants are Evolving: Why Private Companies like OpenAI, Rippling, and Stripe are Offering Liquidity Events Instead of Waiting to Go Public In the past, equity compensation for employees at private companies often felt like a long-term bet: wait for the IPO, or hope for an acquisition. The value of RSUs and stock options was tied to the company eventually going public or getting acquired, leaving employees with little to no options until then. However, that’s no longer the case. More and more private companies like OpenAI, Rippling, Stripe, and others are holding liquidity events before going public or being acquired, giving employees a chance to cash out their equity without waiting for an IPO. These liquidity events are reshaping how equity compensation is viewed and offer employees a more flexible and valuable stake in the company’s growth. For instance: - OpenAI, though still private, has conducted several tender offers where employees could sell a portion of their equity for cash. - Rippling has made similar moves with buybacks, allowing employees to access liquidity in exchange for their stock options or RSUs. - Stripe, in line with the trend, has been offering tender events for its employees, allowing them to liquidate portions of their equity grants. It’s important to note that these events don’t necessarily make the equity immediately liquid like the RSUs at a public company. But, by giving employees the option to cash out periodically, these companies are creating a more realistic view of equity compensation. In fact, recent offer submissions we've tracked show that many private tech companies are offering equity grants that, while still "paper money" until liquidity events occur, are much more valuable than before, simply because employees now have access to these events. For example, of the top 10 offers by total compensation we’ve received in the past year, OpenAI dominates this list with 8 out of the ten offers! Equity grants for these offer submission from private companies often exceed the grants from public companies to compensate for the increased risk. In our recent collaborative blog post with The Pragmatic Engineer, we took a deeper dive into how the highest offers are for these scaleups and quant firms. However, as companies provide more liquidity events, this risk is reducing even further while the comp packages stay the most competitive in the market. What do you think? Have you seen liquidity events offered in your company’s equity plan? Read our collaborative blog post here: https://lnkd.in/gVHGWTry

The uncomfortable truth: if you don’t show investors a path out, they won’t rush to come in. Every investor cares not only about returns, but also how those returns come back to them. It used to be simple: a company grew, went public, and everyone won. Today, that model barely works. In 2010, 83% of all exits came from IPOs. In 2024 - only 3%. The new engine of liquidity is secondary sales - when investors sell their shares to other investors while the company stays private. Last year, they made up 71% of all exits. Funds no longer wait for IPOs. They trade stakes on platforms like Forge and EquityZen. So when you’re raising in 2025, don’t just show how money comes in. Show how it can come out. Here’s what modern exit readiness looks like: 1. Secondary rounds. Allow early investors to sell part of their shares every 12-18 months. 2. M&A mapping. List potential acquirers and why they might buy you - tech, users, margins, or data. 3. Financial buyers. If you reach profitability, you can attract private equity or roll-up funds that buy stable businesses. 4. IPO or SPAC. Public exits are rare but still possible for top performers. 5. Acqui-hire. Being acquired for your team isn’t failure - it’s a softer landing. 6. Buybacks. Founders or the company can repurchase early investors’ shares while keeping control. And for experienced founders, new tools are emerging: Continuation funds and NAV loans let funds access liquidity without forcing a sale. The average time to exit is now over 11 years. Liquidity isn’t the finish line anymore. It’s part of the system you build inside your company. If I were raising today, I’d add one simple slide to my deck: “How investors can exit.” It’s not about selling out. It’s about trust. And in venture, trust is liquidity.

Startup Equity Sales 101 for Startup Employees: Can I sell my Startup shares before an IPO? 1) Gather as many docs as possible (Grant Agreement, Exercise Agreement, Stock Plan, company Bylaws) 2) Identify your equity type: Shares, Options, Restricted Shares, Restricted Stock Units (RSUs) 3) Ctrl+f search these docs for words like "transfer", "Right of First Refusal", "Approval of the Board", "Co-Sale" General legend: OPTIONS - you'll usually have to exercise before or as you sell. Cost to exercise, tax and timing can be huge considerations RSUs - often not sell-able at all before an IPO RIGHT OF FIRST REFUSAL - If you find a buyer at an agreed price, the company usually has 30 days to either approve the deal, or block the buyer and buyback the shares (you still get paid out 🙂) BOARD APPROVAL - Usually these companies are strict and will outright block your proposed sale (you may not get paid out 😢) CO-SALE - sometimes seen for key employees. If you find a buyer at an agreed price, select people e.g. company founders can either approve the deal, or block you as the seller and sell their own shares to your buyer instead of you (you may not get paid out 😢) Generally the greatest optionality is for Shares subject only to a Right of First Refusal. You can try negotiating for lighter equity transfer restrictions when you evaluate a new job offer. Startup employees deserve to feel empowered about where to direct their talents, based on their own financial goals: Do I stay or do I go? Am I willing to wait until IPO to sell? Do I want to prioritize companies that will let me sell some of my shares early, before an IPO? Knowledge is power! #Startups #Equity #Secondaries Note: This is not advice and is intended to be informational only; your personal situation may differ