All investors consider the exit when choosing the projects in which to invest. However, what constitutes the exit? The moment when an individual or legal entity ceases to own the shares of a company in exchange for recovering the amount invested, preferably with the corresponding profits.
What possibilities of exit does my investment have?
The type and difficulty of the exit vary depending on the nature of the investment. In listed markets, while brokers (such as liquidity providers) facilitate the sale and purchase, regulators impose free float requirements on listed companies. However, alternative investment, which consists of acquiring stakes in companies, generally in early stages and with high growth potential, does not have these facilitating elements. For this reason, liquidity and exit potential are lower.
Given this scenario, the question is: how can I recover my alternative equity investment? In Fellow Funders, we have a track record of more than 60 investment rounds made under the umbrella of equity crowdfunding. This article aims to answer this burning question for those of you who have an alternative equity investment and lists the main alternatives:
- Partial or total acquisition of the invested company by a third party. The most recurrent and transparent method. The seller is the one who takes the first step. Therefore, we, as investors, will only have to sign the sale of our shares. In previous posts on our blog, we discussed some possible clauses, such as drag-along and tag-along rights, which may be present in the shareholders’ agreement and facilitate this process.
- Search for a buyer. As mentioned above, alternative equity investment is not carried out in the framework of a listed market. In other words, we must actively search for a person, whether an individual or a legal entity, who is interested in buying our shares. In this case, we must actively search for an individual or legal entity interested in buying our shares. However, this does not mean that we cannot receive the help of a third party to find a buyer, and we, at Fellow Funders, facilitate these processes by acting as intermediaries.
- Exit to alternative listed markets. The potential for a startup or scaleup to grow enough to be listed on listed markets is possible, especially on alternative markets such as BME Growth or Euronext, where we, Fellow Funders, operate as registered advisors or listing sponsors, respectively. As a result, the probability of exit will increase for the reasons mentioned above.
Although it is not considered a way of recovering our investment as such (given that our shares remain intact), another way of obtaining a return on the amount paid for the shares is through dividends. Each company determines in its shareholders’ agreement whether these are distributed. However, if there are dividends, it explains what percentage of the annual profits will be re-distributed among the company’s shareholders.
Here, it is worth remembering that alternative equity investment is not limited to financing startups and scaleups. We can also invest in projects not directly linked to a company’s growth, even though these are often articulated through SPVs. In Fellow Funders, we offer investment opportunities in real estate equity crowdfunding and agricultural projects.
Other models of Exits
First, the financing of the construction/refurbishing and sale of a real estate property. Here, the exit is easier to visualize. After the construction is completed and the houses, storage rooms, premises, or offices are sold, the benefits of the operation are distributed among the partners according to the number of shares they own. These operations usually have a time horizon of 12-36 months.
On the other hand, agricultural projects entail the acquisition of farms for exploitation. Through this exploitation, agricultural products are produced for their subsequent sale. These projects usually pay dividends of 100% of the profits (calculated by subtracting expenses from sales) obtained, allowing us to monetize our investments. However, this situation does not imply that an exit is not possible. For example, when the exploitation period stipulated in the contract ends, the farm is sold, or in case we sell our shares to a third party.
To summarize, the non-existence of a regulatory listed market does not imply that we cannot recover our investment. At Fellow Funders, we are prepared to inform you about the divestment of any of your investees, as well as about the exit possibilities that a company offers before investing in it. After all, this is one of the factors we take into account when preparing our project risk reports.