Introduction
Everything that ends well, both in life and in startup investments, is good.
So, it is advisable to keep in mind the best exit strategies when angel investors are preoccupied with assessing startup acquisitions and the associated due diligence.
In fact, according to experts, exit strategies are an essential component of investments that need to be set up well before the real investing process even starts. As departure plans can greatly affect the kind of returns one receives from a deal. As the startup lists on the public market, some investors get their exit. An IPO is not the only method to exit, though.
Let’s investigate further exits:
Acquisitions and Mergers (M&A)
When a business or its key assets are purchased or acquired by another business, it is referred to as a merger or acquisition. The corporation might be bought out in shares or for all cash. In the latter scenario, an angel investor’s existing company stock is exchanged for stock in the acquiring company. Both of these things can coexist.
Specific share buyouts and sales
There are two ways that this exit route can be executed. The firm board may adopt a specific repurchase to take back the investor’s shares as equity or the company’s Employee Stock Ownership Plan (ESOP) pool, or the founder may decide to buy back the investor’s shares.
Additional sales
One of the most typical methods of leaving a business is through a secondary sale, in which current investors sell their shares to new investors. This typically occurs when a company is raising additional capital and the entering investors wish to buy out the existing investors through a secondary investor. Although it happens frequently in reality, it is viewed as less desirable than an acquisition or IPO.
It can also occur when startup shareholders who are workers seek to sell off a portion of their stock before the business goes public or is bought.
Angel investors should be prepared with a framework of strategy in addition to being aware of the various ways to exit a firm. Here are some the few options to get you started with:
Examine the equity of your stock.
Check the legal paperwork again when thinking about an exit, especially the Share Purchase Agreement (SHA), which specifies the precise amount of shares you acquired as part of the transaction.
Investors should verify their percentage holding on the cap table, whether they are doing so as a consortium, syndicate, or individually, and what it means in terms of equity.
The sequence and amount investors receive in the event of a departure are determined by liquidation preferences, which typically fluctuate over several rounds. Investors must therefore be aware of their position about payout orders’ preference for liquidation depending on exit chances at various stages of a company.
Keep the outstanding and honourable businesses.
An angel investor must continually monitor the progress of the companies in their portfolio. The portfolio must then be divided into groups depending on each company’s past performance and future potential. There could be “poor investments” that don’t yield any returns, “alive investments” that only give back the principal, and “excellent and great investments” that yield returns ranging from 10-15X to 80-100X, respectively.
For greater profits, it is best to hang onto good and great investments for as long as you can. It can truly pay off to be patient in protecting your stakes in these businesses.
Never compare with venture capitalists or institutional investors.
Angel investors are encouraged not to compare themselves to institutional VC funds, particularly the returns generated by VCs, while thinking about an exit because institutional VC funds’ portfolio composition is fundamentally diversified, enabling them to reduce systemic risks.
