I attended Venture 2013 this month. The closing session, End Game: Exits & Liquidity Options reminded me of one of my favorite sayings from my technology investment banking days in Silicon Valley, “Anyone can launch a company. The hard part is landing.”
Panelist ranged from Doug Chu, Head of New York Stock Exchange’s Silicon Valley office, to Norm Fogelsong of Institutional Venture Partners. Each had their opinion about the dangers of IPOs (increased scrutiny by public investors, risk of pricing too high, and the lock up of key members) but all agreed that the exit is not something management teams should enter into lightly.
So, how does one land a company? I’ve created a simple structure to allow entrepreneurs to evaluate various landing methodologies (read: exit strategies).
Below you will find exit strategies ranked by the size of the handcuffs and the level of liquidity they provide.
A merger of equals occurs when we have two companies, A and B, which are roughly the same size, maintain the same financial health, and have the same approximate enterprise value. Company A and Company B simply agree to join forces and create a new entity.
The handcuffs are large and the level of liquidity is typically low.
The two companies may divest or restructure for redundancies, but for the most party they are moving forward together, which creates large handcuffs. The liquidity tends to be low, as there is no real sale, unless partial liquidity is negotiated.
An acquisition occurs when one company acquires another. It is typically a larger company acquiring a smaller company.
The complexity of an acquisition occurs with the presence of an earn out and when stock, not cash, is issued as the main currency. Earn outs require staff from the acquired company to earn their future bonus pay. This creates large handcuffs.
The earn out is based on performance, as most acquirers want to hold on to key management for as long as they can after the sale.
If the company was acquired using stock, those shares are now anchored in the future success of the company.
The size of the handcuffs are increased based on the amount of stock used as currency and the level of liquidity is based on the presence of an earn out.
An initial public offering (IPO) takes place when the shares of the company are sold to the public.
Public stock is tracked by Wall Street Analysts who attempt to predict the performance of the stock. This constant scrutiny creates additional pressure to perform and can create a distraction. Naturally, members of the management team will have a hard time leaving their post.
There is also a lock up period which effects liquidity. The lock up period is a contractual restriction that prevents insiders who are holding a company’s stock from selling for a period usually lasting 90 to 180 days after the company goes public.
The size of the handcuffs are large and the level of liquidity is low for a fixed period of time.
As you begin to build your funding map, consider what type of exit you would like to achieve. Preparing your team for landing is critical.