What Is a Liquidity Event?
Let me explain what a liquidity event really is. It's essentially an acquisition, merger, initial public offering (IPO), or some other action that lets founders and early investors in a company cash out some or all of their ownership shares.
You should think of a liquidity event as an exit strategy for an illiquid investment or equity that has little or no market to trade on. As a founder, you might push toward one, and investors like venture capital firms, angel investors, or private equity firms will expect it within a reasonable time after they put in their capital.
Key Takeaways
Here's what you need to know: A liquidity event lets company founders and early investors turn illiquid equity into cash through events like an IPO or direct acquisition by another company. Investors who back a startup expect to get their money out within a reasonable time. While most investors favor these events, founders might not be as eager if it means diluting their holdings or losing control of the company.
Types of Liquidity Events
A liquidity event is most often linked to founders and venture capital firms cashing in on their seed or early-round investments. The first few employees of the company also stand to benefit big time if the company goes public or gets bought out by another firm.
In an acquisition, the founders and employees are usually kept on board. There might be an initial payout followed by more compensation in shares or cash as they fulfill their contracts with the new owners.
Importantly, the most common liquidity events are IPOs and direct acquisitions by other companies or private equity firms.
The Founder's Role
Sometimes, a liquidity event isn't the main goal for the founders of a firm, even though it definitely is for investors. You as a founder might not be driven by the wealth it brings. Some founders resist pressure from early investors to go public because they fear losing control.
Take Mark Zuckerberg and his cofounders, along with the venture capital firms and shareholders in Facebook's (now Meta) pre-IPO Form S-1 filing in 2012—they saw huge positives from its liquidity event. The company raised $16 billion in the IPO and started trading with a valuation of $107 billion. Zuckerberg, who owned 28.2% before the IPO, ended up with a net worth of about $19.1 billion.
Does the Company Control the Timeline for an IPO?
The timeline for an IPO is usually controlled by the company itself. However, if a company has more than $10 million in assets and over 2,000 investors (or 500 non-accredited investors), the SEC requires it to file financial reports publicly. This is called the 2,000 investor limit.
How Many Companies Go Public Each Year in the United States?
In 2023, there were 153 IPO deals that raised $22.7 billion in the United States, with 132 of them on U.S. exchanges.
What Is a Venture Capitalist?
A venture capitalist is a private equity investor who gives capital to companies with high growth potential in exchange for an equity stake. This could fund startup ventures or expansion efforts.
The Bottom Line
In summary, a liquidity event is what allows a company's early investors to cash out some or all of their equity, through means like an acquisition, merger, or IPO. Companies typically file SEC Form S-1 ahead of their IPO.
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