How the @#$ Do I Cash Out?

A couple of years ago I was traveling on a business trip and landed at a large airport in an unfamiliar city. I left the plane, entered the terminal, but was unable to find my way out of the building. Every turn brought me into a new wing of the convoluted airport and no door was clearly marked “Exit”. I’m embarrassed to admit this but I had to ask a security guard for directions to get out of the building.

Angels who are investing in a business are not signing on for a couple of weeks or a couple of months. It’s a medium-to-long haul effort. In that time, the business (as an operation and as an investment) can become quite complex and the exit might not be clearly labeled when it’s time to go. More importantly, you might wonder when the right time will be to get out so you can maximize your ROI.

The best time to start thinking about an exit strategy is before you invest. Here are 4 elements to consider before pledging that first dollar to the investment:

What do you hope to exit with? If there’s anything that angels think about related to exiting, it’s this. Knowing what you hope to get out of the investment is key, of course. But it’s just the beginning. You should also be thinking about…

How will you exit? Will you sell out completely or will you keep a toe in the water? Will you sell all at once or fade out by selling out over time? Will you convert a portion of your return in cash and another portion as some other kind of asset? Your decisions here will help you structure the investment accordingly.

When will you exit? Some angels might commit their money for a period of time and work to get the company to a certain point by then. Others – perhaps most – angels are likely to commit their money to a certain state-of-the-company. A term like “profitability” or “revenue-generating” might be too vague, so you need to think about the hard numbers. How profitable before you think about exiting? How much revenue and over what period before you think about exiting? In a way, you’re not looking for the date that you’ll be leaving but what “trigger” will signal that it’s time to switch gears and begin to pull out.

As a reference, the “Returns of Angel Investors in Groups” study indicates that “angel investors affiliated with angel groups experienced exits that generated 2.6 times their invested capital in 3.5 years from investment to exit.” [1]

Who will be involved? There are several people that will be involved in your exit. There are the people who will replace you (if you fill a role at the company) and there are the people who will buy your share or stake from you (if that is how the investment was structured). Knowing who these people are – not their names, of course, but their roles and the necessary qualifications – can help you groom the right people to do what needs to be done when it’s time for you to go. For example, you don’t want to have a “trigger” indicate that it’s time to start exiting but then you suddenly realize that no one is in place to fill your role.

It’s not easy to think about these things before you invest – after all, a lot can change – but putting a plan in place now (even if it’s written in pencil) will allow you to negotiate your investment and structure the deal toward the intended end, and it will keep you from panicking if things go awry.

“How the @#$!” case closed.

Note:

[1] Angel Investors in Groups Achieve Investment Returns In Line with Other Types of Equity Deals

Photo Credit: Siebuhr