Liquidity Event
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 a exit strategy for a illiquid investment — that is, for equity that has practically zero 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 inside a reasonable amount of time after initially investing their capital
The most common liquidity events are IP0s and direct acquisitions by different 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 right on time round investments. The first small bunch of employees of the companies also stand to harvest the windfall of their company opening up to the world or being bought out by another company that wants their product or service.
On account of a acquisition, the founders and employees of the firm are usually retained. There would be an initial liquidity event and afterward extra compensation in shares or cash as they serve out their contracted terms with their new owners.
It must be noticed that in some cases a liquidity event is not necessarily the goal of founders of a firm, however it surely is for investors. Founders may not be persuaded by the riches that a liquidity event bestows. Some founders have actively resisted calls of early investors to remove a company public from fear of losing control or demolishing something worth being thankful for. By and large, the resistance is a brief phase.
Founders of companies are not always anxious to take their firm pubic, in some cases due to fear of losing control.
Special Considerations
Frequently, the course of events for an IPO is heavily influenced by the company. Nonetheless, in the event that a company has more than $10 million in assets and in excess of 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 accept that this rule was one reason that Google (presently Alphabet) filed to open up to the world when it did, as the company planned to be forced to disclose its financial data to the SEC at any rate.
Illustration 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 ton of thumbs up for its liquidity event. The company raised $16 billion in the IPO and started 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 around $19.1 billion. This was very much a liquidity event for the then 27-year-old.
Highlights
- While most investors favor liquidity events, founders may not be so anxious on the off chance that the event means weakening their holdings or losing control of their company.
- Investors who back a start-up hope to have the option to take their money out inside a reasonable amount of time.
- A liquidity event allows company founders and early investors to change over illiquid equity into cash through events such as an IPO or direct acquisition by another company.
