“What is your exit strategy?” This is one of the most common questions that startups or early stage companies are asked, but many entrepreneurs have not given their exit strategy much thought. An “exit strategy” does not refer so much to your departure from the company (although it might), but rather how an investor will make a return on his/her/its investment. Although it may seem counterintuitive, giving some thought to your exit strategy up front can help you determine how to structure and operate your company, and many investors will want to know your ideal exit strategy before they invest. Keep in mind that these various strategies are also not mutually exclusive, and your company may experience one or more of these through its lifetime.
- Cash Cow. The simplest answer for what is your exit strategy would be “None!” However, many investors will want to move on and get a return on their investment, and a significant pay day is difficult if there is no opportunity for them to sell their equity. Many serial entrepreneurs would also prefer to exit and move on to new projects rather than stay with the same company long term.
- M&A – aka Mergers & Acquisitions. For a startup, this means the sale of all or a part of your company (either the assets or the equity) to another person or entity. To address a common misconception, an M&A transaction for the equity of a company is not the same as issuing equity as part of a financing round. In a financing round, an investor typically acquires equity directly from the company, and all your existing equity holders continue to be equity holders. Conversely, M&A is a sale of already issued and outstanding equity from a current equity holder to a third party. That current equity holder sells its shares, and that equity holder will receive cash (or other compensation) in exchange for those shares. That liquidation of the investment, which will hopefully include the initial amount invested plus some return, is considered its “exit.”
- IPO – Initial Public Offering. During the ‘Dotcom bubble’ of the late 1990s and early 2000s, startups were rushing to the IPO finish line, emboldened by the seemingly unlimited promise of a new market: online sales. After the bubble burst, startups focused on more modest and sustainable growth. That mentality of an IPO as the ultimate goal has tempered some companies, but it is still a common exit strategy when a company gets to be quite valuable. Facebook, Twitter, and Snapchat have all “gone public”, and other famous startups like Airbnb are rumored to be scheduling their IPOs in 2017. Although this is not a short term plan, it is still the ultimate goal for many startups.
There are also less glamorous or profitable ways of exiting a business: selling/redeeming equity (while the other owners continue to operate the business) or even dissolution of the company as a whole. These may or may not be the exit strategy you initially envisioned when forming your company, but they can be useful methods by which to exit a particular company.
Considering your exit strategy from the beginning is important not only for you as you grow your company, but for your investors and their bottom line. Each option has its own legal advantages and disadvantages, and your investors may have their own ideas. For more information, please contact Ashley Edwards.