Hello. My practice focuses on various aspects of business law, including business formation and corporate documents, trademark and copyright law, tax disputes and contracts. I work with creative entrepreneurs such as photographers, artists and musicians. While most liquidity events take the form of M&A activity or a stock exchange, shareholders can sometimes convert their shares into cash earlier with secondary share sales. A liquidity event is a transaction that allows shareholders of a private corporation to exchange their illiquid investments for cash. While liquidity events may include exit scenarios such as IPOs or acquisitions, this is not always the case. Like PSPC, what happens to your equity depends on the agreements between the merging companies. In a share-by-share merger, your acquired capital is converted into equivalent shares based on the relative valuations of the two companies. In other stores, you can receive money in exchange for your inventory. Often, it can be a combination of both. When companies go bankrupt, entrepreneurs and other shareholders (especially founders and employees) often have nothing. If a small amount of capital remains after the debt has been repaid, shareholders are repaid in order of preference, with priority given to external investors.
(For more information on preferred shares, check out our startup fundraising blog.) Let`s review some of the most common types of liquidity events: While many liquidity events are considered positive milestones, the flip side is also real. Bankruptcy or liquidation is closely linked to insolvency, which effectively means that a company can no longer meet its obligations to its creditors. A merger occurs when one company buys another company and the two companies merge into a new, larger corporation. An acquisition occurs when a company – or private equity firm – buys a majority of the companies instead of forming a combined company. When a takeover bid is sponsored by the corporation itself, it is called a share buyback. Late-stage startups can make share buybacks to combat dilution and reward employees by offering cash. Cash can be used by the company seeking emergency liquidity to invest in other activities or to offset unknown externalities or financial risks. This makes liquidity an important aspect that allows companies to take advantage of opportunities. In a takeover bid, shareholders can sell their shares directly to a buyer, whether an investor or the company`s management. Since these shares are not open to the public, the event can take place when a company is still private.
Given that most venture capital funds have a 10-year lifespan and the initial investment period is 3-5 years, it`s safe to say that most venture capitalists typically expect a liquidity event between 5 and 10 years. According to Statista, the median time from initial venture capital investment in a startup to IPO in the U.S. is 5.7 years. In 2020 (the latest data available), it was 5.3 years. Since entering the profession in 2003, I have worked exclusively in the areas of business and real estate transactions. I started my career in the corporate/finance department of Sidley`s Los Angeles office. I am currently a solo practitioner/freelancer and serve business clients and lawyers in these roles. General partners and limited partners can only make a profit after liquidity events. General partners can earn interest borne by them, and they are the source of all distributions to LPs. But liquidity events are not „universal“ – and the path to getting there isn`t necessarily so easy. A liquidity event is an exit strategy that gives founders and early investors the opportunity to exchange their shares of a company for cash. When the equity held by a company`s shareholders drops significantly, the company`s founders usually hold a liquidation event to repay the profits they made by investing early in a company.
In some cases, founders are reluctant to hold a liquidation event for fear of ruining their business, but investors appreciate the financial benefits of doing so. As an employee, what happens to your equity depends on how the acquisition is made. If the company is bought in cash, you will receive money for your shares and options acquired. On the other hand, if it is acquired for shares, your securities will be converted into shares of the acquiring company. It can also be bought for stocks and cash, in which case you get a combination of both. The liquidity event is not synonymous with liquidation, which is the cessation of activity of a company and involves a reallocation of the company`s assets. When it comes to start-up liquidity events, your outcome often depends on the scenario and terms of the agreement. No matter what type of event your business is experiencing, it`s important to do thorough financial planning in advance. Review your offer letter and stay on top of your company`s announcements throughout the process. The liquidity event refers to the merger, acquisition, sale or purchase of a company.
It also refers to the relationship by which one company buys the assets and assumes the debt of another company. In other words, liquidity refers to a company that receives liquidity through a structural transaction. Erdal Turnacioglu of Erdal Employment Law focuses on providing employment solutions to employees and businesses, whether through litigation, employee handbook review, workplace surveys or training seminars. A liquidity event should not be confused with the liquidation of a company whose business is interrupted. The WhatsApp acquisition and Uber`s IPO are two examples of massively successful exits for venture capitalists, founders, and employees of the company (assuming those employees had equity). Such outflows also have another, more technical term: liquidity events. In this article, we`ll look at the details of liquidity events, including the types of liquidity events and what investors and founders should understand about them. To ensure you`re ready for your company`s liquidity event, it`s important to do your due diligence when you first receive your offer: shareholders are often subject to a lock-up period until a certain period of time after the IPO. This prevents the share price from falling due to a sudden influx of shares into the market. A typical lockdown period lasts between 90 and 180 days, but can vary depending on the company. Here is another website on the concept of liquidity event. Venture capital firms, for example, often ask for liquidation preferences – this could be „2x, no participation“, for example.
In a liquidity case where this clause is relevant, the preferred stakeholders would receive at least double their invested capital before the other shareholders are paid. Of course, there will be significant differences, depending on the startup, its industry, the type of exit and market conditions. For example, Pitchbook notes that the most common startup liquidity event – acquisitions – now occurs at an early stage. In 2021, most acquisitions took place right after a start-up or Series A round. Meanwhile, data shows that most startups don`t go public until their Series C. A liquidity event is a process by which an investor liquidates his investment position in a private company and exchanges it for cash. The main purpose of a liquidity event is to transfer an illiquid asset (an investment in a private company) into the most liquid asset – cash. Venture capital investments are illiquid assets, which means they cannot simply be converted into cash. A liquidity event is the „endgame“ of a venture capital investment – the moment when investors see their investments converted into liquid assets, hopefully for much more than they invest. In a takeover bid, an example of a liquidity event, investors or business owners will buy back shares directly from employees so that the company can avoid issuing new shares. This event can take place in public and private companies.
When liquidity events occur, shareholders pay for some or all of their shares. There are many types of liquidity events that we will look at next. Frankly, liquidity events deserve to keep room in your brain, no matter where you are in the startup journey, whether you`re riding a unicorn, heading for an IPO, or considering a Series B funding cycle. Unlike exit strategies such as IPOs or acquisitions, Takeover bids are often quite simple. Employees who participate in a takeover bid will receive remuneration for their equity based on the market value of their company at the time of the event. However, you can only sell a limited number of shares, depending on the conditions set by the buyer. In corporate finance, a liquidity event is a transaction that allows the owners of a business to realize the value of their investment, such as a merger, acquisition, or IPO. [1] A liquidity event is a typical exit strategy for retail investors who otherwise struggle to prove the value of the company.
