Discuss the Ideal Exit with Investors

While I’m not a fan of putting much time into an exit strategy (see When an Exit Strategy Discussion is Required and The Best Exit Strategy is to Not Have One), it is important to align expectations with investors around the ideal exit outcome. Now, it might seem like investors want to make as much money as possible, but the reality is that many investors, especially institutional investors, have a target rate of return (e.g. 20% per year or three times the cash invested within a few years).

As an entrepreneur, the ideal exit needs to be discussed with investors. Here are a few questions to think about:

  • Are the investors looking for an exit that returns the entire fund?
  • Are the investors looking for a deal that will return 10 times their money?
  • Are the investors looking to return at least 10% of their fund on an exit?
  • Are the investors requiring blocking rights on the sale of the company unless they generate a certain return?

For an entrepreneur that has a personal goal of selling the company for $25 million and pocketing $5 million, it wouldn’t make sense to raise venture money from a big firm at a large valuation. On the other hand, if the entrepreneur raises money from angel investors or a family office that wants to make 5x their money, it could be a good arrangement assuming an appropriate pre-money valuation.

Entrepreneurs would do well to discuss the ideal exit with their investors.

What else? What are some more thoughts on discussing the ideal exit with investors?

2 thoughts on “Discuss the Ideal Exit with Investors

  1. Investors will often want to have one or more seats on your board of directors. The implications of this are important to understand. However, equally if not more important are the ‘protective provisions’ the investor will want written into the operating agreement.

    Protective provisions generally override board powers and can limit things that may not seem like a big deal when you are just starting out and aiming for a big exit. For example, there may be protective provisions to keep you from raising your salary, paying dividends/distributions, adding shareholders, selling shares, selling the company (i.e. blocking the exit), etc.

    It is highly advisable to sit with your attorney, go through the operating agreement in detail and make a separate list of what decisions you will be able to make on your own vs. with the board vs. via protective provisions (i.e. investor approval). When the attorney says that a clause or a provision is ‘standard’ don’t think that is OK just because other companies accept it. Challenge your attorney to explain what that standard provisions will mean to you based on various possible outcomes.

    And, finally, if you can avoid outside investment, that is by far the best way to build a company.

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