Let’s paint a picture: Person A, Fred, is sitting in a meeting with person B. Person B-let’s call him Jackson-is an investor from ABC Capital, for example.
Fred has been determined to pitch Jackson on his new business venture. He’s finally able to catch up with Jackson at a tech conference. Fred is pitching away not realizing that the only thing that Jackson is thinking is, “How do I make my money back on Fred?”
If you have chosen to go the investment route when funding your company, you should know that every investor has one major question on their mind: “What is your exit strategy?” That is, “How do I cash out my shares and get my money back?”
There are two common standards to think about, acquisition and IPO, when it comes to exiting (also called a liquidity event). You should be familiar with both before you sit down with any investor and consider asking for a check.
An acquisition is an action that takes place when another company comes along and decides to buy the ownership stake in your company. Ultimately, the new company will assume control of the old company.
How does this help the investor? The goal is to sell the company at a higher valuation than it’s worth without it being acquired, which means the shares will be more valuable. Once the company is sold, the investor can cash out and recoup their investment plus a return, if all goes according to plan.
What does this mean for you? In some cases, the founders come along with the acquisition, termed an acquihire. That means you will now work, in some capacity, for the company that acquired yours.
In other cases, the founder cashes out, moves along, starts another company, becomes an angel investor or goes and chills on some far-off island for an extended period of time with their newly gained riches. The last one is the least likely.
The initial public offering is the first time that the public can purchase a company’s stock. Prior to this, the company is considered to be private. As with the above liquidity event, the shares will rise in value, allowing the investor to sell off their shares for a higher percentage than what they paid for them. If all goes well, your investor is shouting for joy from the mountaintops.
Most investors want to know your exit strategy before they decide to invest, so it’s best that you start planning ahead.