Explaining investment terms: Exit

Venture capital investors want to see a path from their investment in the company leading to an exit, most often in the form of a disposal of its shares following an IPO or by participating in a sale. Sometimes the threshold for a liquidity event (see liquidation preference and deemed liquidation) or conversion (see Conversion rights) will be a qualified exit. If used, it will mean that a liquidity event will only occur and conversion of preferred shares will only be compulsory if an IPO falls within the definition of a qualified exit. A qualified exit is usually defined as a sale or IPO on a recognised investment exchange which in either case is of a certain value to ensure the investors get a minimum return on their investment.

Consequently, investors usually require undertakings from the company and other shareholders that they will endeavour to achieve an appropriate share listing or trade sale within a limited period of time (typically five to seven years depending on the stage of investment and the maturity of the company). If such an exit is not achieved, investors often build in structures which will allow them to withdraw some or all of the amount of their investment (see Dividend rights and Redemption).

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Chess Pieces - exit strategy

Howard Palmer

Howard is a partner in the corporate technology group.

Angus Miln

Angus is a partner in the corporate technology group.