What is an Exit?
An ‘exit’ is when a founder leaves a startup. For many founders, this is something they’ve planned for from day one, perhaps even hoping to build a unicorn company. They created the startup with the plan of cashing out at some point by selling ownership of the company either to investors or to another company.
What are the benefits of having an exit strategy?
Having an exit strategy helps you to:
- Choose when to leave your business and on what terms
- Create a smooth transition so your business will carry on succeeding without you
- Maximize the selling price of your business
Not all founders have an exit strategy, and some founders have no plans to exit their companies.
Common exit strategies
The most common exit strategies for startups are:
When you sell your company to someone else, that’s an acquisition. The buyer pays you for your business, potentially with some specific requirements attached. It’s common to be asked to stay on for a period of time, often between 6 months and 2 years, to help with the transition.
Typically, your company will be acquired by a larger one in the same field or a similar field. If several competitors are interested in acquiring your company, that can push the price up in a bidding war.
A merger is when your company joins with another to create a new, joint organization. This is designed to be mutually beneficial for both companies. It can help to mitigate each company’s weaknesses and give them a stronger competitive edge in the market.
In practice, mergers normally take place as a merger and acquisition (M&A) as one company is often larger than the other – but “horizontal” mergers between companies of roughly the same size are also possible.
Initial public offering (IPO)
An IPO is when a company “goes public” by floating the company on the stock market and selling shares. Normally, the founder and management team will stay in place, and the day to day operations of the company won’t change much. However, becoming a public company does add certain regulatory requirements.
After an IPO, your own shares will usually be subject to a share lock-up agreement. This means you can’t sell them for a period of time, typically 6 months. So if you want quick cash, you’ll likely want to choose a different exit strategy, like acquisition.
How does a co-founder exit a startup?
It’s not uncommon for a co-founder to exit a startup. They might leave to pursue other goals, either because they no longer agree on the startup’s direction or for personal reasons.
A co-founder exit can create difficulties for the company, particularly if they feel pushed into leaving – or if the board of directors has voted to terminate them. Of course, it’s much more difficult to fire a cofounder if they’re on the board of directors.
It’s important to deal correctly with your co-founder’s equity. If they have been issued shares that are already vested, they own that equity. You’ll normally be able to pay to reclaim unvested shares, but consult an attorney for detailed advice if you fear a legal dispute.