Three Myths And Truths About Exit Planning 

The founders of every startup dream about a grand, lucrative exit as the payout for years of hard work, creativity, and sheer grit. In reality, cashing out is a long-term strategy intrinsic to the lifecycle of a company. It’s never too early to demystify how exiting can really work for the founder.  

Myth: Founders of a company have one exit.  

Truth: There can be multiple “exits,” each of which brings cash to fuel the company’s growth. In each exit the founders and existing investors sell all or part of their stake in the company. Exits can be accomplished not only through an IPO (initial public offering) of stock, but also through a management buyout, merger, acquisition, secondary sale to additional investors, strategic partnership, or spin-off. Each scenario will have its own considerations, implications, and legal structure. 

Myth: The terms of an exit depend on the buyer or investor.  

Truth: Founders should “begin with the end in mind.” The best time to begin exit planning is at the inception of the company. The founders’ ideal exit strategies should be incorporated, as needed, into the articles of incorporation and shareholder agreement for a corporation or the articles of organization and operating agreement for an LLC. At a minimum, there should be exit strategies for the founder’s death, disability, or “business divorce” including a buy/sell provisions if there are multiple founders or other owners. 

Myth: Smaller companies should seek private equity before an IPO.  

Truth: Private equity is especially helpful for “hard tech” (also known as “deep tech”) companies. These companies are applying engineering and science to create breakthrough products, often through a combination of hardware and software, which generates valuable intellectual property. Private equity is often not the most efficient method to spin up capital for SaaS companies, even if the Software-as-a-Service product creates substantial intellectual property. Traditional service companies are not geared toward private equity.  

Call Natasha to decode business law for your current or next venture.  

Natasha M. Nazareth, Esq.



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