Investors take up a stake in the startup with a view to grow their investment and subsequently exit the startup. As such, it is important that a startup considers the exit strategies for the investors right from the start.
When to Exit?
1. Would you rather sell your startup for RM15 million where you are the majority shareholder, OR, sell your startup for RM50 million but you are the minority shareholder? How much time should you spend on your startup until you decide to dispose your stake?
2. Start-ups want to sell for as much money as possible (investors as well) and investors want to maximize their returns and spend as little as possible. As such, founders need to carefully analyse when is the growth rate high instead of when the startup is very profitable.
Types of Exits:
1. Put Option Agreement
A put-option agreement gives the shareholder the right (though not obligated) to sell the shares at a specified price within a specified period.
2. Call Option Agreement
A call-option agreement gives an investor the right (but not obligated) to require the other party to purchase such investor’s shares based on a specified and predetermined formula or at a fair value and within a specified period.
3. Merger & Acquisition (M&A)
This normally means merging with a similar company, or the company that is smaller in size is being bought by a larger company. M&A is an efficient strategy for companies to increase its product line or services. M&A may be a preferred route for investors if the market conditions are not conducive for an IPO exercise to be undertaken.
4. Initial Public Offering
IPO brings about many benefits to the company, amongst which, are (i) the huge amount of capital raised and this facilitates expansion, corporate marketing and development, and/or acquisition capital, (ii) as an exit strategy for the founders, (iii) provides a ‘publicity campaign’ to the company where the IPO can attract potential partners, customers, and most importantly, strategic investors, (iv) enabling a higher valuation to the founders ,where studies have shown that founders in public companies sell at an average that is much higher than the founders in a private company, (v)
providing stock options to employees; and (vi) greater transparency and corporate governance – this boost shareholders’ confidence and investors.
5. Trade Sales
The founders of the startup sells the company to another company. It is quite common to founders to dispose its startup and move on to other ventures or projects. An example of this is no other than Reclip.It (co-founded by CEO of MaGIC, Cheryl Yeoh) that was acquired by Walmart Labs.