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Understanding IPO Exit Strategies and Why they Matter

By Ryan Prete, Jul 27, 2023

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Welcome to the fourth and final installment of our educational blog series on initial public offerings. In our first blog, we examined the IPO process in great detail, discussing the alternative paths companies may take to list on a public stock exchange, the filings needed to launch an IPO, and much more. In our second installment, we discussed the advantages and disadvantage of an IPO; analyzing the factors a company should consider before beginning the journey towards a public listing. In our third blog, we focused on IPO readiness, a necessary and crucial conversation about the steps a company needs to complete to position itself for success in the public markets. In our final blog series on IPOs, we’ll dive into exit strategies related to IPOs, examining why preparing for an exit is crucial for pre-IPO investors; while breaking down the various forms of an exit.

What is an IPO Exit Strategy?

An IPO exit strategy refers to the plan that early investors such as venture capitalists (VCs) or private equity firms, use to realize their investment gains when a privately-held company goes public through an initial public offering (IPO). It is a crucial step for these investors to sell their shares and monetize their investments after the company’s shares become publicly traded on a stock exchange.

One important thing to remember is that an IPO exit strategy is primarily tailored to the needs and objectives of early investors. For the company itself, going public opens up opportunities for fundraising, increased visibility, and potential acquisitions, but it also comes with additional regulatory and reporting requirements, which we have discussed in detail in our previous IPO blog installments. 

How does an IPO Exit Strategy Work?

Here’s how an exit strategy normally works:

  1. Investment Period: Early investors provide funding to the company during its early stages, often when it is still privately held. They may hold various classes of shares with different rights and privileges.
  2. Company Growth and IPO Preparation: Over time, the company grows and develops its products, services, and revenue streams. As it reaches a certain level of maturity and fulfills the requirements set by regulatory bodies and stock exchanges, it may decide to go public through an IPO.
  3. IPO Process: During the IPO, the company issues new shares to the public and allows existing shareholders, including early investors, to sell their shares on the open market. The company sets the IPO price based on investor demand, market conditions, and the company’s valuation.
  4. Lock-Up Period: Early investors and company insiders are typically subject to a lock-up period after the IPO. This is a predetermined duration during which they are not allowed to sell their shares. Lock-up periods usually last for a few months to a year, ensuring that there is stability in the share price during the early trading period.
  5. Post-Lock-Up Exit: Once the lock-up period expires, early investors can start selling their shares on the open market. They can do this gradually to avoid flooding the market with a large volume of shares, which could drive down the share price.
  6. Market Conditions and Timing: The timing of the exit is essential. Early investors will want to sell their shares when the market conditions are favorable and the share price is at its peak. This requires careful analysis of market trends, the company’s performance, and overall economic conditions.
  7. Diversification and Risk Management: The exit strategy may involve diversifying the investment portfolio to manage risk. Early investors might choose to sell some shares and hold onto others, depending on their investment goals and confidence in the company’s future prospects.
  8. Secondary Offerings: In some cases, early investors may opt for secondary offerings after the IPO. This involves selling additional shares to the public, which can be used to raise more capital for the company or provide an opportunity for early investors to further cash out their investments.

Exit Outcomes: The outcomes of the IPO exit strategy can vary. Ideally, early investors aim to realize substantial gains from the increase in share value since their initial investment. However, market fluctuations and company performance can impact the actual returns.

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How Does an IPO Function as an Exit Strategy?

An IPO can function as an exit strategy for early investors, founders, and other existing shareholders of a privately-held company. When a company goes public through an IPO, it offers its shares to the public for the first time on a stock exchange. This allows existing shareholders to sell their shares and realize their investment gains, essentially providing an exit opportunity. An IPO can serve as an exit strategy by providing liquidity to investors, creating realized investment gains, providing diversification to an investment portfolio, serving incentives to employees and founders, providing the possibility for future rounds of raised capital, and more.

How Does an IPO Compare to Other Exit Strategies?

  1. Let’s start with an Initial Public Offering (IPO): As discussed earlier–and in detail in both our first and second IPO blog installments–an IPO involves offering a company’s shares to the public for the first time on a stock exchange. It allows existing shareholders to sell their shares and realize their investment gains. An IPO provides liquidity, brand visibility, and potential for future capital raising. You can also read further about IPO readiness in the third installment of our IPO series
  2. Mergers and Acquisitions (M&A): In an M&A exit, a company is acquired by another company, either through a full acquisition or a partial acquisition (majority stake). An M&A exit can be a cash transaction or involve an exchange of shares, and can be an attractive option when a larger company seeks to expand its market presence or access new technologies by acquiring a smaller company. 
  3. Strategic Sale: Similar to M&A, a strategic sale involves selling the company to another business that sees strategic value in the acquisition. The acquiring company may have complementary products, technologies, or market access, making the purchase beneficial for both parties.
  4. Buyback: A company can buy back its own shares from existing shareholders, providing an exit opportunity for investors who wish to cash out their investments. Buybacks can be done at a pre-agreed price or at the prevailing market price.
  5. Secondary Sale: In a secondary sale, existing shareholders sell their shares to new investors or private buyers, rather than the company itself. This allows early investors or employees to exit their positions without the company directly participating in the transaction.
  6. Recapitalization: Recapitalization involves restructuring the company’s capital structure, often through the issuance of debt or preferred shares, to provide liquidity to existing shareholders. This can be useful when some shareholders want to exit while others want to maintain their positions.
  7. Liquidation: In certain situations, if a company cannot find a suitable buyer or its operations are no longer viable, it may choose to liquidate its assets and distribute the proceeds to shareholders. This is typically considered a last resort and occurs when the company is unable to continue as a going concern.
  8. Initial Coin Offering (ICO) or Token Sale: In the context of blockchain and cryptocurrency projects, an ICO or token sale allows investors to purchase digital tokens as an investment in a project. Investors may later exit by selling their tokens on cryptocurrency exchanges.
  9. License or Royalty Agreement: In some cases, a company may choose to license its technology or intellectual property to other businesses in exchange for royalties or licensing fees. This arrangement can provide a steady stream of income for the company and serve as an exit strategy for investors seeking ongoing returns.
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Who Should Create an IPO Exit Strategy?

Creating an IPO exit strategy typically involves collaboration among various stakeholders, each with their unique roles and perspectives. Developing an IPO exit strategy is a collaborative effort that involves input from many professionals within a company’s executive team, including company management and founders, a company’s board of directors, investment bankers and underwriters, early investors and shareholders, legal and financial advisors, and more.

Why is an Exit Strategy Important for Pre-IPO Investors and Post-IPO Investors?

Let’s start with pre-IPO investors, who often stand to benefit the most from an exit when a pre-IPO investment has been made. Reasons why an exit strategy is crucial for pre-IPO investors include:

  1. Liquidity: Investing in private companies can tie up capital for an extended period, as shares are not easily tradable like public company shares. An exit strategy provides liquidity, enabling investors to convert their equity into cash, which can be reinvested in other opportunities or used to diversify their investment portfolio.
  2. Risk Management: Investing in startups and early-stage companies involves higher risks compared to established businesses. An exit strategy provides investors with an opportunity to mitigate risk by selling their shares at a favorable valuation or finding a suitable buyer during periods of growth and positive market sentiment.
  3. Realizing Investment Gains: Pre-IPO investors, such as venture capitalists and private equity firms, invest in early-stage companies with the expectation of significant returns on their investments. An exit strategy allows these investors to cash out their investments and realize their gains once the company goes public through an IPO or employs other exit methods.
  4. Regulatory Compliance: Pre-IPO investors often have predefined holding periods or requirements that govern their investments. An exit strategy ensures compliance with these obligations and any other regulatory considerations associated with their investments.
  5. Opportunity Cost: Holding onto illiquid assets for an extended period may lead to opportunity costs, as investors might miss out on potentially more lucrative investment opportunities in more liquid markets.
  6. Market Fluctuations and Timing: Market conditions and the company’s performance can impact the value of the investment. Having an exit strategy allows investors to assess market fluctuations and determine the optimal timing to sell their shares.

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Why an Exit Strategy is Crucial for post-IPO investors

For retail or institutional traders who have invested in a company that is already public, an exit strategy is important for a number of reasons, including:

  1. Diversification: Post-IPO investors may have a substantial portion of their wealth tied up in the company’s shares. An exit strategy encourages diversification, reducing concentration risk and spreading investments across various asset classes.
  2. Realizing Investment Gains: Post-IPO investors, including institutional investors and retail shareholders, still seek to realize their investment gains. An exit strategy enables them to sell their shares in the company at a favorable price and lock in profits.
  3. Retirement and Financial Planning: For individual investors, an exit strategy is crucial for retirement and long-term financial planning. It provides a roadmap to achieve their financial goals and secure their future.
  4. Tax Planning: An exit strategy can incorporate tax planning considerations. For example, investors may choose to hold onto their shares for a specific period to qualify for more favorable tax treatment on capital gains.
  5. Rebalancing: Regularly reviewing and adjusting one’s investment portfolio is essential. An exit strategy facilitates portfolio rebalancing, ensuring that the investor’s risk profile and investment objectives are aligned.

In Conclusion: Understanding Exit Strategies Provides Greater Access to Capital and Peace of Mind

It’s pivotal that companies seeking an initial public offering also create an exit strategy plan, and that investors understand and create an individual plan once they’ve secured an investment in a pre-IPO company. Like we discussed in our IPO readiness blog, one can never be too prepared, especially when it comes to managing capital investments. While an IPO itself is a form of an exit, it doesn’t stand alone. Mergers & Acquisitions, Strategic Sales, Buybacks, and other forms of exits create unique opportunities for investors, as we discussed above. Even for post-IPO investors, creating an exit strategy plan is necessary, smoothing the process of tax planning, diversification, and rebalancing; all while strengthening an investors’ piece of mind. As always: education is key. We hope this final installment of our IPO blog series has been helpful to readers; be sure to return to our blog to revisit the other pieces of our IPO series, and to read up on other worthwhile topics. 

This material, provided by Linqto, is for informational purposes only and is not intended as investment advice or any form of professional guidance. Before making any investment decision, especially in the dynamic field of private markets, it is recommended that you seek advice from professional advisors. The information contained herein does not imply endorsement of any third parties or investment opportunities mentioned. Our market views and investment insights are subject to change and may not always reflect the most current developments. No assumption should be made regarding the profitability of any securities, sectors, or markets discussed. Past performance is not indicative of future results, and investing in private markets involves unique risks, including the potential for loss. Historical and hypothetical performance figures are provided to illustrate possible market behaviors and should not be relied upon as predictions of future performance.


Ryan Prete

Ryan Prete

Ryan is a financial writer for Linqto, known for his original blog content, articles, and other works. He previously worked as a financial writer at PitchBook Data, where he covered private equity, and as a reporter for Bloomberg in Washington D.C.,where he reported on tax policy. Ryan has also reported on cybersecurity policy for Inside Washington Publishers. His work has been featured in The Wall Street Journal, Axios, Yahoo News, and Reuters. He is a graduate of the University of California, Santa Barbara.