Ways that liquidity events can occur

Once every couple of months, I receive a question that never ceases to surprise me…

I’ll be talking to a sophisticated LP who asks me something along the lines of, “So I can pull my money out of a venture fund whenever I want, right?”

No, you can’t just pull your money out whenever you want, it’s generally locked up for 5-10, or more years!

I’ll usually go on to explain all of the different ways that a liquidity event can occur. These milestones impact all shareholders, including the founders, the employees, and the angel investors/VCs who invested in them:

1. The startup is acquired outright by another company (M&A).

- Decision to sell is made by senior management and the board of directors.
- Sale is often a mix of cash and acquirer’s equity.
- Shareholders receive cash or a mix of cash and equity in the acquiring company.

2. The startup sells partial ownership to another company or investor (M&A).

- Decision to sell is made by senior management and the board of directors.
- Buyer purchases equity directly from existing shareholders (which includes earlier investors and former/current employees).
- Sometimes shareholders are required to sell a certain percentage of their equity. Other times, they have the flexibility to decline that offer.

3. The startup organizes a Tender Offer.

- A Tender Offer is a formal, structured event with a defined period, offer price, and deal terms.
- Employees, investors, and other shareholders generally have the option, but not the obligation, to sell some or all of their vested equity in the tender offer.

4. A buyer offers to purchase secondary.

- “Secondary” refers to the process of buying shares in a private company directly from one of its shareholders.
- A secondary sale is usually solicited/initiated by a buyer but can be initiated by a seller.
- The transaction occurs privately between two sellers at a price and on terms that each party agrees to. However, the company is also required to give its approvals.

5. An old-fashioned IPO.

- Senior management and the board of directors decide to offer a portion of company equity to the public.
- An investment bank underwrites the Initial Public Offering.
- All shareholders are subjected to a lockup period of 90-180 days after the IPO.
- Once the lockup period has passed, any shareholder can now buy or sell stock on the public markets.

As an investor, I’ve experienced 4 out of the 5 liquidity events described above.

I’ve had a portfolio company get acquired in its entirety and I’ve had a portfolio company sell a portion of itself.

I’ve seen a tender offer allow employees and investors to collect returns while still holding onto a portion of their shares.

I’ve completed a handful of secondary sales - both buying and selling.

And last on my list that I am still holding out for — the big one: An IPO.