Understanding Liquidity Before the Exit
For years, liquidity in startups meant one thing: wait for the big exit. Whether through an IPO or an acquisition, that was the long game for everyone involved: founders, employees, and investors alike. But today’s startup landscape is different. Companies are staying private longer. Funding cycles have expanded. And liquidity, once a distant milestone, is becoming a necessary tool along the way. In this post, we will explore how liquidity works before the exit, the options available to founders and early stakeholders, and what you need to consider if you're building or investing in a company with a long road to a traditional exit.
Why Liquidity Matters More Than Ever
Startups are maturing differently now. Ten years ago, companies like Facebook went public in under a decade. Today, many high-growth businesses operate privately for 10, even 15 years. That long timeline can make it difficult for early employees and investors to access any return on their equity, often their most valuable asset.
Pre-exit liquidity. It's become a lifeline for founders and team members looking to fund new ventures, pay taxes on stock options, or simply achieve personal financial goals. For investors, it’s a way to de-risk a long-term position without abandoning support for the company.
The Rise of Secondary Transactions
One of the most common ways to unlock liquidity is through secondary sales, when existing shareholders sell their shares to new investors.
Secondary sales don’t generate capital for the company, but they do serve a vital purpose: allowing founders, employees, and early backers to realize value without forcing a company into an early exit.
Platforms like CartaX, Forge, and EquityZen have made this easier by streamlining transactions and verifying pricing. Secondary markets are now playing a bigger role in the startup economy, especially in later-stage companies where demand from outside investors remains high.
Equity-Backed Loans: Borrowing Without Selling
Another liquidity option gaining traction is loans backed by startup equity. In this model, individuals use their shares as collateral to access cash, often without selling a single share.
Here’s how it works:
A founder or early employee borrows from a lender based on the current valuation of their equity.
The loan typically carries interest and is structured to be repaid at the time of an eventual exit or liquidity event.
Some companies even offer internal lending programs as a benefit to key team members.
While this option avoids dilution and keeps cap tables intact, it does carry risks, especially if the company’s valuation drops or an exit is delayed. Still, for those confident in the future of their startup, it’s a compelling way to stay invested and financially flexible.
Private Equity as a New Liquidity Channel
Traditionally, private equity firms entered the picture much later, usually post-exit. But today, many PE firms are acquiring minority stakes in growth-stage startups, offering direct liquidity to founders and early investors.
This approach has become especially appealing in tech. Firms like KKR, General Atlantic, and Insight Partners are investing in companies that may not go public for years but have strong fundamentals and clear revenue models. These investments give the startup fuel to grow, while giving shareholders a chance to take some chips off the table.
Best Practices for Startup Liquidity
If you're considering liquidity for yourself or your team, here are a few best practices to keep in mind:
Get Clear on the Company’s Position: Liquidity should support growth, not signal weakness. Ensure the company is in a strong financial and strategic position before exploring options.
Protect the Cap Table: Too many secondary sales or poorly timed loans can impact the cap table and scare off future investors. Maintain transparency and cap table hygiene.
Understand the Tax Implications: Secondary sales and equity-backed loans can have complex tax consequences. Involve a tax advisor early in the process.
Communicate with Stakeholders: Be transparent with your board, co-founders, and team. Liquidity decisions affect everyone, not just the seller.
Final Thoughts: Liquidity Is Now Part of the Growth Journey
Liquidity is no longer a one-time event at the end of a company’s story—it’s now a thoughtful part of the journey. Founders don’t need to wait a decade to see the value they’ve built. Employees shouldn’t have to walk away from great companies just to pay down loans or fund life goals.
As long as it’s managed with care, liquidity can strengthen startups, fuel new ventures, and keep everyone motivated along the way.