Raising capital is like entering into a prenuptial agreement. Just as couples plan for a hopeful future while preparing for the possibility of parting ways, founders should lay out a clear exit plan for their investors from the start. Investors may be drawn to your vision, but their primary goal is a return on their investment. Before accepting their funding, founders need a strategic plan for how, when, and under what circumstances investors will get their money back.
Here’s why an exit plan is crucial and how you can strategically plan to ensure investors are paid, no matter the route.
⚡️𝗪𝗵𝘆 𝗮𝗻 𝗘𝘅𝗶𝘁 𝗣𝗹𝗮𝗻 𝗜𝘀 𝗖𝗿𝘂𝗰𝗶𝗮𝗹 ⚡️
At its core, an exit plan outlines how your company will eventually provide a return to your investors. Just as a prenuptial agreement aims to protect both parties’ interests, a well-defined exit strategy clarifies expectations for all involved. Investors want to know, from day one, how they’ll see returns and what options they have down the road.
Creating this plan forces you to think long-term and align your goals with those of your investors. Establishing a mutual understanding of the potential exits and aligning around them is invaluable for your relationship with investors, giving them confidence in your direction and keeping your focus sharp on value creation.
💵 𝗠𝘂𝗹𝘁𝗶𝗽𝗹𝗲 𝗣𝗮𝘁𝗵𝘀 𝘁𝗼 𝗣𝗮𝘆𝗶𝗻𝗴 𝗕𝗮𝗰𝗸 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀 💵
There’s no one-size-fits-all approach to providing returns. Here are several exit options that will help tailor your plan to suit your business model and growth trajectory:
𝗠𝗲𝗿𝗴𝗲𝗿𝘀 𝗮𝗻𝗱 𝗔𝗰𝗾𝘂𝗶𝘀𝗶𝘁𝗶𝗼𝗻𝘀 (𝗠&𝗔)
The most common exit for startups, an acquisition, is like a clean separation where another company buys your assets. This route offers the opportunity for a large payout based on your company’s equity value, benefiting investors substantially.
𝗜𝗻𝗶𝘁𝗶𝗮𝗹 𝗣𝘂𝗯𝗹𝗶𝗰 𝗢𝗳𝗳𝗲𝗿𝗶𝗻𝗴 (𝗜𝗣𝗢)
Considered the “golden exit,” an IPO allows your company to go public, letting investors sell shares on the open market. Like an ambitious marriage of growth and recognition, it comes with the potential for high returns but carries the risk and expense of volatility.
𝗥𝗲𝗰𝗮𝗽𝗶𝘁𝗮𝗹𝗶𝘇𝗮𝘁𝗶𝗼𝗻
Recapitalization is a restructuring of equity or debt, providing a payout to early investors while bringing in new capital. It offers flexibility for investors to exit without a full sale or IPO, retaining company ownership structure for future growth.
𝗦𝗲𝗰𝗼𝗻𝗱𝗮𝗿𝘆 𝗠𝗮𝗿𝗸𝗲𝘁 𝗦𝗮𝗹𝗲𝘀
This option allows investors to cash out early by selling shares to other interested parties. Platforms like SharesPost and Forge Global facilitate these transfers, allowing investors to liquidate without disrupting the company’s operations.
𝗕𝘂𝘆𝗯𝗮𝗰𝗸𝘀
In this strategy, the company or founders repurchase shares from investors. Though challenging for early-stage companies, buybacks offer control and flexibility, preserving ownership for founders while providing investors with a payout.
𝗣𝗿𝗼𝗳𝗶𝘁 𝗗𝗶𝘀𝘁𝗿𝗶𝗯𝘂𝘁𝗶𝗼𝗻𝘀 (𝗗𝗶𝘃𝗶𝗱𝗲𝗻𝗱𝘀)
If your business is cash-flow positive and stable, distributing profits through dividends may be an option. Although rare in high-growth startups, dividends offer investors steady returns without equity sales.
𝗔𝗹𝗶𝗴𝗻𝗶𝗻𝗴 𝗘𝘅𝗶𝘁 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝗶𝗲𝘀 𝗪𝗶𝘁𝗵 𝗬𝗼𝘂𝗿 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀
Misalignment between founders and investors can be as problematic as differing life goals in a marriage. Each investor may have unique expectations regarding their exit, so have open discussions before signing any agreements. Understanding the type of exit each investor prefers can help prevent future friction and ensure everyone is on the same page.
𝗧𝗵𝗲 𝗟𝗼𝗻𝗴-𝗧𝗲𝗿𝗺 𝗕𝗲𝗻𝗲𝗳𝗶𝘁𝘀 𝗼𝗳 𝗮 𝗖𝗹𝗲𝗮𝗿 𝗘𝘅𝗶𝘁 𝗣𝗹𝗮𝗻
A clear exit plan goes beyond merely appeasing investors; it helps direct your company’s path forward. By keeping the exit in mind, you’ll stay focused on long-term value creation, knowing the path to liquidity and how your company will achieve it.
𝗖𝗼𝗻𝗰𝗹𝘂𝘀𝗶𝗼𝗻
Just as a prenuptial agreement is designed to protect both parties, an exit plan safeguards the interests of both founders and investors. By having a strategic exit plan—whether it’s an acquisition, IPO, or alternative option—you set yourself up for successful fundraising, investor alignment, and a clear vision for the future.
