Understanding the concept of Exit Options
Exit Options
is nothing but different ways through which investors can ‘cash out’ of an
investment. To understand the concept of exit options, let us understand how
Venture Capital works.
Angel
investors, VCs and Private Equity Funds buy equity in a company when they make
an investment. I.e. they buy shares of the company at an agreed price. Let us
say they buy 100,000 the shares of the company as a per share price of Rs.100.
Investors make this investment NOT to earn dividend but to have substantial
gain through increase in the value of
the shares that they have bought.
Over a period
of a few years, depending on the outlook of the investor, the investor would
want to ‘cash out’ of their investment. For this, they will have to sell their
shares to someone else. Who all they can sell the shares to are what is called
the exit options.
Typically,
there is a hierarchy of exit possibilities. i.e. angel investors, who invest in
the earliest stage of the company, typically seek an exit by selling their
shares to VCs who invest when the company’s concept and business model is
proven. Often VCs would get complete or partial exits by selling shares to
another VC who invests in the company after the company has gained some traction
and needs further capital to scale up.
In addition
to selling shares to the next round of investors, the following exit options
are available:
- Sale to a strategic partner e.g. a travel services company may sell stake or be acquired by a large travel portal
- Sale to a bigger brand in the space: e.g. a local online food ordering site may be acquired by a global brand when they want to enter that market
- Of course, going IPO is an aspirational exit option for many
- Buy back: When the promoters or company buys back the shares of the investors. This is the least preferred option for investors and is usually used when the company is not able to provide any other exit option to the investors.
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