Liquidity Event
A liquidity event is an acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to cash out some or all of their ownership shares. A liquidity event allows company founders and early investors to convert illiquid equity into cash through events such as an IPO or direct acquisition by another company. Founders of a firm push toward a liquidity event and investors (such as venture capital (VC) firms, angel investors, or private equity firms) expect one within a reasonable amount of time after initially investing their capital A liquidity event is an acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to cash out some or all of their ownership shares. While most investors favor liquidity events, founders may not be so eager if the event means diluting their holdings or losing control of their company.
What Is a Liquidity Event?
A liquidity event is an acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to cash out some or all of their ownership shares.
A liquidity event is considered an exit strategy for an illiquid investment_ — _that is, for equity that has little or no market to trade on. Founders of a firm push toward a liquidity event and investors (such as venture capital (VC) firms, angel investors, or private equity firms) expect one within a reasonable amount of time after initially investing their capital
The most common liquidity events are IP0s and direct acquisitions by other companies or private equity firms.
Understanding Liquidity Events
A liquidity event is most commonly associated with founders and venture capital firms cashing in on their seed or early-round investments. The first handful of employees of the companies also stand to reap the windfall of their company going public or being bought out by another company that wants their product or service.
In the case of an acquisition, the founders and employees of the firm are usually retained. There would be an initial liquidity event and then additional compensation in shares or cash as they serve out their contracted terms with their new owners.
It must be noted that in some cases a liquidity event is not necessarily the goal of founders of a firm, though it certainly is for investors. Founders may not be motivated by the riches that a liquidity event bestows. Some founders have actively resisted calls of early investors to take a company public out of fear of losing control or ruining a good thing. In most cases, the resistance is a temporary phase.
Founders of companies are not always eager to take their firm pubic, in some cases due to fear of losing control.
Special Considerations
Often, the timeline for an IPO is under the control of the company. However, if a company has more than $10 million in assets and more than 2,000 investors (or 500 shareholders who are not accredited investors), the Securities and Exchange Commission (SEC) requires it to file financial reports for public consumption. This is known as the 2,000 investor limit.
Many believe that this rule was one of the reasons that Google (now Alphabet) filed to go public when it did, as the company was going to be forced to disclose its financial data to the SEC anyway.
Example of a Liquidity Event
Mark Zuckerberg, his group of cofounders, and the venture capital firms and individuals listed as major shareholders in Facebook's pre-IPO Form S-1 filing in 2012 had a lot of thumbs up for its liquidity event. The company raised $16 billion in the IPO and began its first day as a publicly traded company with a valuation of $107 billion. Zuckerberg, who owned 28.2% of Facebook before the IPO, suddenly found that his net worth was approximately $19.1 billion. This was quite a liquidity event for the then 27-year-old.
Related terms:
2000 Investor Limit
The 2,000 investor limit is an SEC rule requiring that a company file financial reports if it exceeds 2,000 individual investors and $10 million in assets. read more
Accredited Investor
An accredited investor has the financial sophistication and capacity to take the high-risk, high-reward path of investing in unregistered securities sans certain protections of the SEC. read more
Acquisition
An acquisition is a corporate action in which one company purchases most or all of another company's shares to gain control of that company. read more
Business Exit Strategy
A business exit strategy is a plan made by an owner to sell their company, or their share in a company, to another corporation or group of investors. read more
Drive-By Deal
A drive-by deal is a slang term referring to a venture capitalist (VC) who invests in a startup with a quick exit strategy in mind. read more
Exit Strategy
An exit strategy is the method by which a venture capitalist or business owner intends to get out of an investment that they are involved in or have made in the past. read more
Illiquid
Illiquid is the state of a security or other asset that cannot quickly and easily be sold or exchanged for cash without a substantial loss in value. read more
Initial Public Offering (IPO)
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. read more
Private Equity : How Does It Work?
Private equity is a non-publicly traded source of capital from investors who seek to invest or acquire equity ownership in a company. read more
Registration Right
A registration right entitles an investor who owns restricted stock to require that a company list the shares publicly for sale. read more