Every venture capitalist is chasing the next Google or Facebook – but one of the most important things to consider in your journey is how do you plan to get out. If you’re not thinking about your exit strategy, it’s time to start. Learn about some of the different ways founders and investors can cash out on their investments.
Exit Strategies are an important aspect of every founders and investors journey. Whether they are aware or not, they will have a strategy for getting back their investment and then some after their round of funding completes or if they decide to sell their company outright.
Founders typically form an LLC, LP or Corp for their company. The business entity is essentially the “person” or physical front for the company. Think of it like a person in a suit and tie. It is easier to get into deals upfront and looks more professional to other companies and investors than just starting off as an individual. The business entity will be the one signing contracts, taking investment, filing tax returns and handling all of your finances. It will also be the one that will have to pay back venture capitalists that fund you if something goes wrong with your company.
So lets take a look at some of the ways a founder can exit their startup.
Acquisition is one of the most common ways to exit and will likely be your first choice if you’re looking to live out the dream of owning your own company. This is also referred to as “an acquisition” or a “merger,” and its pretty easy to accomplish since almost all technology companies have at least one product.
When interested in an acquisition, you’ll essentially approach potential acquirers with a cash offer. Potential acquirers could be a private equity firm or someone that believes they might want to acquire your company. The other option is to go public, which will give you access to the public markets and hopefully some liquidity for your investors after you’ve completed your exit/sale of company. If you take the public stock route, it will be a one-time tax event and will not be an ongoing expense. The other option is to sell memberships in your company. This is a very attractive option for founders that have sold out or want to retain some equity in their company.
Obviously, the price and terms of these acquisitions are somewhat dependent on the size of your company. If you’re talking about acquiring a startup with $5 million revenue, its going to be pretty hard to pay cash for them. And if you’re talking about a small business with 1-2 people, they probably won’t have enough value for an acquisition offer to be made.
This type of acquisition is one that can augment the growth of the acquirer or give them a different perspective of how to work with the founders. In some cases, these acquisitions are done in exchange for stock or options in your company. The most important thing here is to make sure you actually get something for being acquired aside from just being bought out of your company.
Another way a strategic acquisition could work is if a big company thinks they’ll be able to help you grow much quicker than you would on your own. In some cases, these strategic acquisitions are done because of the late stage funding you received. Since acquiring a company is very expensive, an acquisition is usually more cost efficient if you have already raised a lot of money on your own.
Another common way to exit is to sell shares or stock of your company in public markets. This can be done through a direct public offering (DPA) or through a registered direct offering (RDPO). A DPA is basically letting the public buy shares in your company by following SEC rules and regulations. An RDPO is like being publicly traded, but it has less regulations and happens as an offering without following specific SEC rules and regulations.
You can also grow your company through an initial public offering (IPO). This brings liquidity to early stage investors and helps you grow your business through a hostile takeover bid. In the case of an IPO, it is not unusual for founders to sell a portion of their company in exchange for cash. This helps them increase their cash position and help pay down debt while retaining a portion of their business.
Many founders will do some kind of licensing of their technology after they’ve finished building their company. In order to map out how this is going to work, you need to walk through the whole licensing process and understand why it’s beneficial for your business.
There are two ways that licensing works. The first approach is an exclusive licensing agreement where you agree to only license your technology, and in exchange can apply certain patents or trademarks that are not owned by you. This is a very common agreement when building a company in Silicon Valley where everyone wants something exclusive.
If you don’t want a license with so many strings attached, you can also do a non-exclusive licensing agreement. This way you can have total control over your technology but still be open to licensing your company’s name or technology on the market.
Another thing to keep in mind is that if you choose to go for an exclusive agreement, most startups will not be able to sell their products without the involvement of the company they purchased the technology from. In addition, there are only certain types of licensing that are allowed under U.S law and it may be illegal for you to license your technology in other countries.
If you think this is something you want to do, make sure you’re comfortable with keeping your board and investors informed about what you’re doing. The last thing you’ll want to do is surprise everyone by selling your company without their knowledge.