Exits: How the Return Is Actually Realised

That distinction between book value and realised value is the most misunderstood feature of this asset class. It's why professional investors think about the exit before investing rather than after: who might buy this company one day, and why?

1. Strategic acquisition

The most common route. A larger company buys the startup for a commercial reason: access to technology, a customer base, a channel, a licence, or a team.

What makes a company an attractive target: filling a clear gap for the buyer, or accelerating a plan the buyer would otherwise have built themselves at greater cost and time. A company whose place on someone's map isn't obvious is rarely bought.

What reduces value: heavy dependence on one person, revenue concentrated in one customer, disorganised intellectual property, or unclean books.

2. Merger

Combining two companies into a larger entity. Less common, and usually an option when both need greater scale to survive. Immediate liquidity is typically limited, since much of the consideration is paid in shares of the new entity.

3. Secondary market

Selling your stake to another investor without the company itself being sold. It provides partial liquidity ahead of a major exit event, and may include founders selling part of their holdings in a later round.

Practical constraints: it usually requires company or shareholder approval under the transfer restrictions in the articles, and may transact at a discount to the last round's valuation in exchange for immediate liquidity.

4. Initial public offering

The most visible route and the least frequent. It requires scale, institutional discipline, audited financial history, and satisfaction of regulatory and market listing requirements. Even when it happens, it doesn't mean immediate liquidity for early shareholders: lock-up periods typically apply.

5. Acquihire

A large company buys the team rather than the product. The financial outcome for shareholders is usually modest — partial or full return of capital at best — and it's an acceptable outcome when the alternative is closure.

6. Liquidation

When operations cease and assets, if any, are sold. The outcome is typically a total or near-total loss for shareholders. This possibility is intrinsic to the asset class, which is why position sizing was a more consequential decision than company selection.

7. How proceeds are distributed

This is where what was signed earlier shows up. Distribution doesn't follow ownership percentages directly but the order of priority specified: obligations and debt are settled first, then liquidation preferences for preferred shareholders are applied, then the remainder is distributed to common shareholders.

The practical consequence: in a modest exit, preferred investors may recover most of the proceeds and little remains for founders and common shareholders — even if the headline sale price looks good. In a large exit, the effect of these clauses diminishes because the amount far exceeds them.

The rule: you cannot understand your expected return without reading the preference provisions first. Detail in Investment Terms.

8. Timing

There's no general rule, but several factors govern the decision:

• Market conditions: acquisition and listing windows open and close with the economic cycle.
• Position on the growth curve: the best time to sell is usually while growth is still convincing to a buyer, not after it plateaus.
• Investors' time horizons: funds operate with defined lives, and approaching the end creates pressure toward an exit.
• The company's alternatives: can it raise another round on good terms? If not, negotiating options narrow.

Conflicts of interest are real: what suits a fund near the end of its life may not suit a founder building for the next decade. This is why horizon alignment is discussed at investment, not at exit.

9. What makes a company exit-ready

• Clean, audited books and regular financial statements.
• An accurate cap table with no outstanding or undocumented commitments.
• Registered and fully assigned intellectual property.
• Revenue not concentrated in a single customer.
• Operational independence from the founder — a company that doesn't run without them is harder to sell.
• Assignable contracts without change-of-control termination provisions.
• Regulatory compliance and valid licences.

This is the same list examined in due diligence — meaning a company ready for investment is ready for an exit by the same logic.

Common mistakes

• Ignoring the exit at the point of investment. Investing in a company with no conceivable buyer.
• Confusing paper valuation with realised return.
• Overlooking the effect of preferences on actual proceeds.
• Declining a good offer while waiting for a better one without weighing the chance the window closes.
• Neglecting document readiness until negotiations begin, lengthening the deal and weakening your position.

Checklist

• A clear view of plausible exit routes at the time of investment
• Understanding of how preferences affect distribution across scenarios
• Alignment of time horizons among shareholders
• Regular books and financial statements
• An accurate cap table with no outstanding commitments
• Assigned and registered intellectual property
• Reduced revenue concentration and key-person dependence
• Review of change-of-control provisions in contracts

FAQ

How long does an exit typically take?
Usually many years, varying widely by sector and route. It's prudent to assume a long horizon at the point of investment.

Can I sell my stake before an exit?
Sometimes, through a secondary transaction, subject to transfer restrictions and the necessary approvals — usually at a discount to the last valuation.

What is the most common exit route?
Strategic acquisition, by a wide margin over public listing.