An exit strategy is a plan or strategy for startup investors to exit their investment in a company and realise a return on their investment. This typically involves selling their shares in the company through a public or private market, such as an initial public offering (IPO), acquisition, secondary market sale, buyback, or liquidation.
Exit strategies are important for startup investors as they provide a mechanism for realising the value of their investment and moving on to other opportunities. Investors typically enter into a startup investment with the expectation that the company will eventually become successful and generate a return on investment. However, the success of a startup is never guaranteed, and investors need to have a clear plan for exiting their investment if the company fails to meet expectations.
As mentioned above, there is a range of options that investors can utilise to realise their investments.
An IPO allows startup investors to realise their investment by providing a market for their shares. Prior to an IPO, shares in a startup are typically held by a small group of investors, such as founders, angel investors, and venture capitalists. The shares are not easily tradable and may be subject to restrictions on sale or transfer.
When a startup undergoes an IPO, it issues shares to the public for the first time, which are then traded on a public stock exchange. This creates a liquid market for the shares, allowing investors to sell their shares to other investors, thereby realising their investment.
The process of going public through an IPO typically involves several stages, including registration with the Securities and Exchange Commission (SEC) or equivalent for the jurisdiction of the market, preparation of a prospectus outlining the company’s business, financials, risks, and other relevant information, and underwriting by an investment bank or a group of investment banks. The underwriters help price the IPO, allocate shares to investors, and provide support in the early trading of the shares.
Once the IPO is complete, the startup’s shares are traded on a public stock exchange (e.g., NASDAQ for tech companies). Investors can then buy and sell these shares as they would any other publicly traded stock, allowing them to realise their investment in the startup.
It is important to note that the success of an IPO can depend on many factors, including the strength of the company’s business model, financials, market conditions, and investor demand. A successful IPO can provide a significant return on investment for startup investors, while a poorly executed IPO can result in a lower-than-expected valuation and a smaller return on investment.
An acquisition or merger is another exit strategy for a startup investor. In this scenario, the startup is acquired by another company or merges with another company, allowing investors to sell their shares and realise their investment.
When a startup is acquired, the acquiring company usually pays a premium for the startup’s shares, providing a return on investment for the startup’s investors. The premium may be based on factors such as the startup’s market potential, intellectual property, or customer base.
The acquiring company may be a competitor in the same industry, a company in a related industry, or a larger company looking to expand its product offerings or geographic reach. The acquisition may be driven by a desire to acquire the startup’s technology, talent, or customer base.
In a merger, the startup combines with another company to form a new entity. The investors in the startup may receive shares in the new entity or cash for their shares, depending on the terms of the merger agreement.
Acquisitions and mergers can provide a faster exit for startup investors than an IPO, as the process can be completed more quickly and with less regulatory oversight. However, the success of an acquisition or merger can depend on many factors, including the strength of the startup’s business model, the compatibility of the two companies, and the terms of the acquisition or merger agreement.
Overall, an acquisition or merger can be a viable exit strategy for a startup investor, providing a return on investment and the opportunity to participate in the growth of a larger company.
A secondary market sale is an exit strategy available to startup investors where the investor sells their shares to another investor or to a private equity firm in a private transaction, rather than through a public market such as an IPO.
The secondary market for startup shares has grown in recent years, with the emergence of several well-known platforms that facilitate private transactions between investors. These platforms allow startup investors to sell their shares to other investors or to private equity firms, providing a market for shares that are not easily tradable on public exchanges.
The secondary market for startup shares can provide several benefits to investors, including a faster exit than an IPO or acquisition, the ability to sell shares in smaller increments, and the ability to sell shares before a liquidity event such as an IPO or acquisition.
However, it is important to note that the secondary market for startup shares is not as liquid or transparent as public markets, and investors may have to accept a discount to the fair value of their shares to ensure that they are sold.
Overall, a secondary market sale can be a viable exit strategy for a startup investor, providing an opportunity to sell shares in a private transaction to another investor or private equity firm, and potentially realise a return on investment.
A buyback is another exit strategy for startup investors, in which the company offers to buy back shares from its investors. This can allow investors to exit their investment by selling their shares back to the company at a predetermined price.
A buyback can provide several benefits to both the company and its investors. For the company, a buyback can be a way to return cash to shareholders, reduce the number of outstanding shares, and potentially increase the value of remaining shares. For investors, a buyback can provide a way to realise their investment and potentially receive a premium over the current market price of the shares.
Buybacks can take several forms, including open market purchases, tender offers, and direct negotiations with investors. The terms of the buyback, including the price and timing, are typically negotiated between the company and its investors.
It is important to note that buybacks may not always be available to all investors, as they may be subject to certain restrictions or requirements. Additionally, the success of a buyback can depend on factors such as the company’s financials, the demand for its shares, and the willingness of investors to sell their shares.
Overall, a buyback can be a viable exit strategy for startup investors, providing an opportunity to sell their shares back to the company and potentially realise a return on investment. However, investors should carefully consider the terms of the buyback and assess whether it is the best option for realising their investment.
Liquidation is a potential exit strategy for startup investors in which the company sells off its assets and distributes the proceeds to its investors. This is typically used as a last-resort option, when the company is unable to continue operating or has failed to achieve its financial goals.
In a liquidation, the company’s assets, including its intellectual property, inventory, and equipment, are sold off to pay off its creditors and other obligations. Any remaining proceeds are distributed to the company’s investors, according to their share ownership.
While liquidation is not an ideal outcome for a startup investor, it can be preferable to holding onto shares in a company that is no longer operating or generating revenue. Liquidation allows investors to realise some value from their investment and move on to other opportunities.
However, it is important to note that in a liquidation scenario, investors are likely to receive only a portion of their initial investment back, as the proceeds from asset sales are typically divided among creditors and other obligations first.
Overall, while liquidation is not an optimal exit strategy for startup investors, it can be a necessary option in situations where the company is unable to continue operating or has failed to achieve its financial goals.
The choice of exit strategy can depend on various factors, including the nature of the company’s business, its financials, market conditions, and the preferences of the investors. For example, an IPO may be more appropriate for a company with strong growth potential, while a buyback may be more suitable for a company with a stable cash flow and a desire to return cash to its shareholders.
Exit the right way with EquityMatch
At EquityMatch, we don’t just concentrate on investors and startups finding each other; our commitment goes all the way from the initial stages to exit strategy. We understand that having a well-defined exit strategy is an important part of startup investing, and can help investors maximize their returns and minimize their risks. Our experienced consultants can guide you on which exit strategy is right for you.