Exit Options
Exit Options are one of the most discussed aspects of a venture capital fund-raising process. The promoters and the investors make money if and only if the company is able to provide a decent exit to the investors. Exit Options are important for all concerned parties (promoters, investors) as a good return on investment consummates the hard work, efforts put in by the promoters and the risk taken by the investors.
When it comes to exiting from the company (i.e. selling the common shares) the equity holders mostly exercise one of the following three options-
- Initial Public Offering (IPO)
- Mergers and Acquisition (M&A)
- Company/Promoters Buy Back
Initial Public Offering (IPO): IPO is the process to selling the company’s shares to public. After the IPO, the shares are traded in a stock exchange and people can buy and sell shares by paying a small brokerage. This is one exit option that all investors love. IPO provides the investors time, price and quantity flexibility. Investors can choose to sell any quantity at anytime and at any price once the company’s shares are listed on a stock exchange.
Mergers and Acquisition (M&A): M&A is the process of selling the company’s shares, partially or completely, to another company. This is the second preferred option by the investor as it does not provide them the flexibility to exit at their chosen time and they have to sell all their shares in one go. In most cases of an M&A, the pricing, timing and quanta is specified simultaneously and investors do not have the flexibility in their exit.
Company/Promoters Buy Back: This is the least preferred option by the investor. In company/promoters buyback arrangement, the company or the promoters agree to buy the investors’ shares at a certain price if company is not able to provide any other exit either through the IPO or M&A. This option is least preferred because here investors’ returns are capped and there is no upside beyond that. However, investors like to put this in the shareholders’ agreement so that at least their capital and minimum returns are protected even if company does not do as well as projected.
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