What is a Liquidity Event?

A liquidity event is an exit strategy that private company ownership uses to cash out all or a portion of shares.

It is intended to exchange a relatively illiquid asset into cash, the most liquid asset.

What are the different types of liquidity events?

Initial public offerings (IPOs) are initiated by private companies to take a company public through a stock issuance. This allows company ownership to exchange private company shares, an illiquid asset, for cash. To initiate an IPO, a private company hires investment banks to set the price and date, market the IPO, and measure demand.


Another type of liquidity event is a direct acquisition. If a private company prefers not to go public, it can sell part or all of its ownership to an interested party. Direct acquisitions are typically undertaken by other companies or a private equity firm. If the purchasing party gets more than 50% of the company, it is now in charge of decision making.


During an acquisition, the original company founders are usually kept on board. Unlike hostile takeovers, acquisitions are typically agreed upon between companies with mutually beneficial terms. Both parties determine which assets the acquiring company must purchase and then the transaction occurs.

Why do liquidity events occur?

Liquidity events can be initiated for legal reasons, market condition changes, and to prevent losses. Many liquidity events are planned ahead of time to trigger once a profit target is achieved. Other reasons include funding growth initiatives, letting the board of directors diversify ownership, increasing public awareness, and raising capital to cover debts.

What is an example of a liquidity event?

A company with a large private equity investor may agree to initiate an IPO once it reaches a certain market value. Let’s look at an example to demonstrate this.


Octagon Computer Solutions is a software company with a market capitalization of $5M. It needs $2M in outside funding. It decides to make a deal with West Coast Equity, a private equity firm that agrees to invest $2M into Octagon in exchange for 30% of the company.


The two parties come to an agreement that states when Octagon reaches a market capitalization of $30M, it will initiate an IPO and allow West Coast Equity to liquidate. 2 years later, Octagon Computer Solutions reaches the $30M mark and initiates an IPO.


During the IPO, West Coast Equity sells all its shares for $12M, earning a profit of $10M over 2 years. Octagon Computer Solutions also sells shares but keeps majority ownership in the company. As a result, Octagon liquidates partial ownership for cash but remains the primary decision maker for the company.


This is just one of many possible examples demonstrating how a liquidity event can take place.


A liquidity event occurs when a private company exchanges full or partial ownership into cash. This can be done through an initial public offering (IPO) that takes the company public by selling shares of ownership to investors. It can also be done through direct acquisition, which involves selling company ownership to a private equity firm or another company.


Companies initiate liquidity events for reasons like paying off debts, raising money for expansion, and giving in to pressure from private equity investors.