Pre-IPO Liquidity: Selling Before the Bell

A generation ago, a company that reached the public markets was young. In 1989 the average business going public was about six years old. By 2021 that had roughly doubled, to twelve. Deep private capital now lets a company raise enormous sums and grow for a decade or more without ever ringing the bell, and for the founders and early employees, that patience carries a private cost. Most of their pay is stock. Their net worth climbs into the tens of millions on paper while their bank balance does not move.

It is a strange kind of wealth. You can watch it grow on a cap table and still struggle to pay the tax on the options you just exercised, or to stop lying awake over the fact that your job and your fortune ride on the same single outcome. Pre-IPO liquidity is the set of honest tools for turning a slice of that paper into money while the company is still private.

The Concentration Nobody Would Advise

Strip away the excitement and a pre-IPO employee holds a position no advisor would ever recommend to a client: a single, illiquid, privately held stock, worth most of their net worth, in the same company that also signs their paycheck. If the business stumbles, the equity and the income fall together, at exactly the moment the person can least afford either. Diversification is the oldest advice in finance for a reason, and it applies to founders too, even when the stock is the best thing they have ever owned.

This is not an argument to sell everything. Concentration is also how fortunes are made, and the founder who dumps every share at the first chance usually regrets it. The argument is narrower and harder to disagree with: taking some off the table is prudent, and there are structured ways to do it that neither signal a loss of faith nor break the company's own rules.

How Liquidity Gets Structured

The most common route is a tender offer that the company organizes. It opens a window in which a defined set of holders may sell a set number of shares at a price fixed in advance. In a company buyback, the business repurchases the shares itself. In an investor-led tender, an incoming or existing investor buys them directly from employees, often as one piece of a larger financing. Either way the company controls the terms, and those terms usually include limits: a cap on how much of your vested equity you can sell, frequently around a fifth, along with rules on tenure and on who is eligible at all. Auctions, where price is set by demand rather than fixed in advance, exist too, but the fixed-price tender dominates because it is orderly and easy to explain.

Outside a company-run process, holders sometimes sell shares directly to a buyer in the secondary market, though most companies restrict private transfers through a right of first refusal and a transfer policy, precisely to keep control of who sits on their cap table. And rather than sell at all, some executives borrow against their shares, taking a loan secured by the stock. That can bridge a tax bill without giving up the upside, but it stacks borrowing and margin risk onto a position that is already concentrated, and it deserves real caution.

Where The Money Actually Goes: The Tax

The headline sale price is not what a seller keeps. For an employee selling shares acquired by exercising options, the arithmetic runs through the strike price, the 409A value the company used to set that strike, the type of option, and how long the shares have been held. The gap between the exercise cost and the sale price is where the tax lives, and whether it is taxed as ordinary income or as a long-term capital gain can change the net by a wide margin. A sale that looks generous before tax can be far less so after, and a little sequencing, exercising earlier to start the holding clock, or timing a sale against the rest of a year's income, is often worth more than a slightly better price.

This is also where pre-IPO liquidity meets the larger plan. The same low, private valuation that makes shares cheap to exercise makes them cheap to move into a trust for the next generation. A founder selling a few shares for cash should be thinking, at the same table, about the ones they intend never to sell.

The Discipline

The right amount of pre-IPO liquidity is rarely zero and almost never everything. It is enough to pay the taxes the equity itself creates, to take the most fragile part of the risk off the table, and to let the person who built the company make decisions from security rather than from fear. Sold with that intent, a pre-IPO tender is not a vote against the company. It is the same counsel any good advisor gives any client who wakes up one day holding a single stock worth more than everything else combined: keep the conviction, and take some of the chips off the table.