The exit that took a detour
GOINGVC · DEAL STRUCTURE
The Anatomy of an Exit
Hey John,
Last week, we broke down acquisitions: what happens when one company buys another.
An exit is broader.
For an investor, the exit is the point when ownership turns into liquidity.
That can happen through an acquisition, an IPO, or a secondary sale. So while acquisitions can create exits, the two are not the same thing.
Figma is a useful example. Adobe agreed to buy the company for about $20 billion in 2022, but the deal never closed. For shareholders, the expected exit never happened.
And when an exit does happen, investors measure it at more than one level.
At the investment level, you compare what the fund receives with the check it originally wrote. At the fund level, you compare those proceeds with the total capital paid in by its LPs.
A $10 million investment that returns $18.4 million produces a 1.84x multiple on the investment. For a fund with $100 million of paid-in capital, that same $18.4 million contributes 0.184x to DPI.
That is why understanding an exit requires looking beyond the headline price. The real questions are how much capital comes back, to whom, and what that return means for the fund.
FROM OFFER TO FUND
In this hypothetical sale, a buyer offers $100 million for the company. The fund invested $10 million for 20% ownership on an as-converted basis, with a 1x non-participating preference.
Enterprise Value
$100.00
Equity Value
$92.0M
Fund's 20% stake
$18.4M
Fund cash at closing
$16.56M
$1.84M stays in escrow until the claims period ends
Illustrative figures from Anatomy of an Exit. They exclude fund fees, carried interest and taxes.
For this 20% stake to return the entire $100 million fund, the buyer would need to pay shareholders $500 million.
Three things to check in an exit
01
Has the deal actually closed?
An acquisition can be announced, signed and still never close. Figma is a good example.
02
What reaches shareholders?
Debt, cash, transaction costs and liquidation preferences can make the shareholder payout very different from the headline deal value.
03
When does the capital arrive?
Cash at closing, escrow, earnouts and stock consideration carry different timelines and risks. Timing also affects metrics such as DPI and IRR at the fund level.
Our latest article follows the process from transaction headline to investor payout, including cap tables, liquidation preferences, escrow and fund returns.
That's it for this week. Thanks for reading.
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-GoingVC Team
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