Startup Exit Strategy

What is a Startup Exit Strategy?

A startup exit strategy describes a strategy aimed at converting equity – i.e., ownership shares held in a company – into liquid assets, such as cash or freely tradable public company stock. Simply put, a startup exit strategy derives its name from the opportunity offered to owners of equity to “exit” the company in exchange for cash or other liquid assets. A startup exit strategy is commonly called a “liquidity event”, as illiquid assets (ownership shares held in a company) are converted into liquid assets, such as cash. 

Generally speaking, there are three different types of liquidity events that an owner can employ as a startup exit strategy. These liquidity events include (i) a merger or acquisition event in conjunction with another company; (ii) an initial public offering (IPO) of ownership shares at a public stock exchange; or (iii) the simple event of discontinuing the company and “winding down” (i.e., closing) the business, which naturally results in the sale of substantially all of the company’s assets.

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Which is the best Startup Exit Strategy for you?

Determining the best startup exit strategy primarily depends on the individual situation and the specific goals that the owner is currently pursuing. As such, the appropriate strategy depends on whether an owner is seeking to expand and continue the business by taking advantage of merging with another company, to independently raise capital through offering ownership in the company on a public stock exchange, or to discontinue the business altogether. As such, the best startup exit strategy inherently depends on the owner’s individual end goals. 

The best Startup Exit Strategy variations

Startup exit strategy variation

The first startup exit strategy is a Merger or Acquisition Event. Such an event describes the process in which two companies merge, either as a new entity which now comprises the two merging companies or, alternatively, when one firm merges into the other one – with one firm effectively “absorbing” the other. Owners (i.e., shareholders) can effectuate an exit in this manner by exchanging their current shares for either cash or equity in the “absorbing” company. Owners will need to pay attention to the important distinction between a merger and an acquisition, as these are distinct concepts, a fact which is often overlooked. An acquisition is a term that encompasses various different events, including stock acquisitions, asset acquisitions, and mergers. Hence, a merger is a specific form of acquisition, which describes the process of one company melding with the other – the “absorption” process, as previously described. 

The second startup exit strategy addressed in this article is an Initial Public Offering (IPO). In an IPO, a company’s shares are offered for sale to the public for the first time. An IPO is conditioned on obtaining approval from the U.S. Securities and Exchange Commission (SEC) and having one or multiple investment banks finance the offering. This specific startup exit strategy entails offering ownership stakes in the company in exchange for cash to a large audience – i.e., the general public. After an IPO, a company will be labeled as a public company, due to the fact that ownership in this company is now available to the public in exchange for cash, whereas companies not offered on a public stock exchange are referred to as private companies.The price at which an ownership interest, in the form of company shares, will be traded is determined by various factors, including supply, demand, and the general performance and future prospects of the underlying company.  

The third startup exit strategy is a so-called Secondary Sale. A secondary sale can occur for many reasons, but oftentimes it is simply due to the owner’s desire to disassociate from the business and its activities. In order to effectuate an exit in this manner, a shareholder sells however much of their stock they desire to sell to a third party, outside of a specified event such as an IPO or a merger or acquisition event. The proceeds from this sale will go directly to the seller of the shares, while in return the buyer receives ownership of the shares in the company. In essence, if a shareholder decides to sell all of their shares in a secondary sale, they can completely disassociate from the company and also implicitly express their intent to not further continue the business. 

In conclusion, a startup exit strategy is a strategy that is geared towards offering the owner of shares in a startup an exit path in which they exchange an illiquid asset, shares in the company, for a liquid asset, oftentimes in the form of cash. Generally speaking, three primary strategies exist; however, the best startup exit strategy depends largely on the individual goals and future plans of the current shareholder.  

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Disclaimer: This blog article is provided by Pandev Law, LLC for general educational and informational purposes only. Although this article discusses general legal issues, it does not constitute legal advice nor does it establish an attorney-client relationship. No reader should act or refrain from acting on the basis of any information presented in this article, or elsewhere on this website, without seeking the advice of appropriate legal counsel, or other professional counsel, licensed in the relevant jurisdiction. Pandev Law, LLC expressly disclaims any and all liability with respect to any actions taken, or not taken, based on any content of this article or website. This blog article may constitute attorney advertising. Prior results do not guarantee a similar outcome.

Adrian Pandev

As the principal attorney at Pandev Law, I have helped hundreds of foreign individuals and companies successfully navigate their journey to the United States. Previously, I served as Trial Attorney at the U.S. Department of Justice. Now, I represent foreign investors, founders, and high-net-worth-individuals in business, immigration, and wealth planning matters. I am an early proponent of blockchain technology and serve as strategic advisor to blockchain startups and cryptocurrency investors. Selected to the Super Lawyers New York Rising Stars list 2019-2021. Follow me on Twitter, LinkedIn, or Instagram.

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