2 min read As an investor, you receive your most significant return on investment when your startup investment takes its exit. But, is your startup investment ready to exit their business? This article covers reasons to exit, when to sell, and how to exit successfully as an investor.
Reasons to Exit the Business
There are many reasons to exit the business. However, here are some key ones to consider:
- The company is ready to go IPO. By taking the company public, new ownership comes into place.
- The market has changed dramatically, putting the future of the business into question.
- The business failed and can no longer remain solvent.
- The owners lose interest and decide to follow other passions.
- The owners lose the physical ability to run the business and need to find someone else.
For every business, there comes a time to sell. Ask the following questions to find if now is the right time to sell the company:
- Do they still want to run the business? They may want to move on to new projects and opportunities, and the current company may no longer be fulfilling.
- Do they still believe in the business and what it can do for them? Sometimes the market changes and the business opportunity is no longer there.
- What can they get from the business today versus two years from now? Waiting a few years to sell may give them a better exit.
- Do they need more funding, and can they raise it? If they cannot, then consider exiting.
- What do the other team members want to do? Aside from your interests, what do the different stakeholders want? It takes a team to run a business. If they want an exit, that should be part of the consideration.
It’s easy to get into a startup investment but challenging to get out, especially with a positive return. Most startup exits come when they sell the business to another company or go public on the stock exchange. It takes seven to ten years to achieve an exit in most cases.
Most investors let the startup define the exit. If they do, that’s great. If they don’t, then you define an exit for your investment. I recommend using a convertible note that has a 3X in 3-year redemption right at the investor’s sole discretion. This provides you the option of exiting at the 3-year mark or staying in for the long haul. By year three it becomes clear where the startup is headed. They are either on the venture path to larger returns, or they have left the venture path and moved into payroll mode.
The problem with leaving the venture path is that most terms sheets give the investor an equity stake. If the company leaves the venture path and turns into a lifestyle business, then the equity is going to be worth, at most, a small return typically around the 10-year mark.
Define the exit you want and make an offer. Not all startups will take it, but many will.
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: firstname.lastname@example.org