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Understanding Exits: The Angel Investor's Finish Line

the confident investor Feb 17, 2021

An exit is an opportunity to sell your equity in a private company.

 

After searching for your startup, assessing it, investing, and waiting, an exit event may occur, causing the company to change drastically and giving you the choice to sell your shares, hopefully for a profit.

 

Successful startups usually exit in 3-5 years but may take up to 10. Again, angel investing is a long-term investment and requires patience. 

 

There are several different types of exit events. These include Initial Public Offerings (IPOs), acquisitions, and even bankruptcy.

 

In the angel investing world, exits yield huge returns—upwards of 20x to 100x of your initial investment.

 

Let’s dive in and explore the different types of exits, when they happen, and how they affect you.

 

Initial Public Offering

The first and most desirable type of exit is an Initial Public Offering.

 

Only companies that have established themselves within their markets and garnered significant success and attention can reach an IPO. 

 

When a startup “goes public” it registers with the SEC before selling shares on the public market through investment banks and stock exchanges. Once public, any investor can buy stock in the company and become a partial owner.

 

An IPO is usually the finish-line for seed investors. This is a golden opportunity to sell your shares and reap big returns. 

 

However, some investors may choose to keep their shares and stay tied to the company hoping for more money down the road. This strategy is case-specific and depends on your goals as an investor. 

 

In almost every case, if a company you invested in reaches an IPO, investors are ecstatic and eager to sell. When the company you invested in goes public, you have reached the angel investor’s finish line and can finally enjoy the fruits of your labor.

 

Acquisitions

An acquisition is a more common, yet still desirable, type of exit.

 

When a startup is acquired, that means the company is purchased by a larger company that sees value in its technology, team, intellectual property, and/or market share.

 

When a startup's value becomes high enough, business suitors are bound to come knocking. The startup and buyer start to negotiate and, assuming everything goes well, an agreement is made. The buying company purchases the startup and takes over its operations.

 

If you own equity in the startup, your ownership will be purchased too. This is your opportunity to sell your stocks and exit the company. 

 

If the value of the company at the time of the acquisition is higher than when you bought it, you will make a profit. Acquisitions, like IPOs, can yield incredible returns for investors. 

 

One of the best things about an acquisition exit is just how quickly it can happen. The road to IPO is usually long, but an acquisition may come years before an IPO would ever be possible. 

 

Other Types of Exits

There are a few less common types of exits to be aware of. These are usually less desirable than IPOs and acquisitions.

 

  1. Management buyouts - In this scenario, the founders of the startup buy back all of the shares from investors. This represents an exit window for an investor who can sell their shares back to the owners.
  2. Sale of secondary shares - In some cases, you will be able to sell your shares directly to another private investor. 
  3. Asset sales and bankruptcies - This is the least desirable exit for investors. When a company “goes under” you will have a chance to sell your shares. 

 

Finding Your Winning Exit

When investing in a startup, angels need to plan for an exit.

 

An IPO exit is uncommon but extremely profitable. Acquisitions are faster and more common but still have incredible return potential. 

 

Risk-tolerance and patience are essential traits for angel investors. The path may be difficult, but the rewards create wealth unlike anything else.

 

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