In life and in startup investments, all’s well that ends well.
So when angels are caught up in evaluating startup deals and the due diligence involved, it is wise not to lose sight of the most suitable exit ways.
In fact, experts believe that exit strategies are a crucial part of investments that must be in place well before actually beginning the investing process. After all, exit strategies can hugely impact the kind of returns one gets from a deal. Some investors attain their exits when the startup lists on the public market. However, an IPO is not the only way to exit.
Let us explore other pathways to exit:
Mergers and Acquisitions (M&A)
Mergers and acquisitions refer to a company or its major assets being bought or acquired by another company. The company may be getting acquired for all cash or acquired in stock. In case of the latter, an angel investor’s stock in the existing company gets swapped with the stock of the acquiring company. A mix of both is also possible.
Specific sale-share buyout
This exit route can take place in two formats. Either the founder can choose to buy back an investor’s shares or the company board can approve a specified buyback to take it back as equity or the company’s Employee Stock Ownership Plan (ESOP) pool.
Secondary sale
A secondary sale is one of the most common ways of exiting a startup, where existing investors sell their shares to others. This usually happens when the company is raising subsequent rounds and the incoming investors want to buy out through a secondary existing investor. Although common in practice, it is regarded as less attractive than an acquisition or IPO.
It can also happen when employees, who own shares of the startup, want to liquidate a portion of their shares before the company goes for an IPO or gets acquired.
In addition to knowing the different ways of exiting a startup, it is important that angel investors are armed with a framework of strategies. Here are a few to begin with:
Check your stake in terms of equity
While considering an exit, make sure to recheck the legal documents, especially the Share Purchase Agreement (SHA), which outlines the specific number of shares you own as part of the deal.
Investors must check the percentage holding they have on the cap table, either as a consortium, syndicate, or at an individual level – and what it translates to in terms of equity.
Liquidation preferences – which determine the order and the amount investors get in the event of an exit – usually changes over a series of rounds. Thus, investors need to be aware of where they stand in terms of the liquidation preference for payout orders based on exit opportunities at different stages of a company.
Hold on to the good and the great companies
An angel investor must always stay updated about the developments of their portfolio companies. Then the portfolio needs to be categorized based on their performances and the promise they hold. There could be ‘bad investments’ with no returns, ‘alive investments’ which just returns the principle, and the ‘good and great investments’ which will generate anywhere from 10-15X returns to 80-100X returns, respectively.
It is best to hold on to good and great investments for as long as possible for bigger returns. Having patience in preserving your stakes in these companies can really pay dividends.
Do not compare with VC and institutional investors
When considering an exit, angel investors are advised not to compare themselves to the institutional VC funds, especially the returns made by VCs, because their portfolio construction is fundamentally diversified, allowing them to mitigate systemic risks.
At the end of the day, angel investors' approaches are vastly different from the workings of a venture capitalist.
(To learn more about angel investing, explore Learn by LetsVenture, a destination portal for lessons across stages of angel investing and free resources)
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