Your relationship with your investor
Most venture capital firms’ executives have a wide range of experience.
Many have worked in industry and others have a financial background, but
what is more important, all have the specialist experience of funding
and assisting companies at a time of rapid development and growth. Levels
of support vary, however, ranging from “hands-on” to “hands-off”.
However, venture capital investors typically operate somewhere between
these two extremes.
Hands-on
Hands-off
Exit options for investors
The options
Trade sale
Repurchase
Refinancing
Flotation
Involuntary exit
Hands-on
A “hands-on” or active approach aims to add value to your
company. In addition to advising on strategy and development, the venture
capital firm will have many useful business connections to share with
you. The venture capital firm aims to be your business partner, someone
you can approach for helpful ideas and discussion. A hands-on investor
is particularly suited to a company embarking on a period of rapid expansion.
However, day-to-day operational control is rarely sought. In order to
provide this support, some venture capital firms will expect to participate
through a seat on your board. The director may be an executive from the
venture capital firm or an external consultant and fees will need to be
paid for the director’s services. The venture capital firm will
expect to:
· Receive copies of your management accounts, promptly after each
month end.
· Receive copies of the minutes of the board of directors’
meetings.
· Be consulted and involved in, and sometimes have the right to
veto, any important decisions affecting the company’s business.
This will include major capital purchases, changes in strategic direction,
business acquisitions and disposals, appointment of directors and auditors,
obtaining, etc.
Hands-off
Some investors will have a less active role in the business, a “hands-off”
or passive approach, essentially leaving management to run the business
without involvement from the venture capital firm, until it is time to
exit. They will still expect to receive regular financial information.
If your company defaults on payments, does not meet agreed targets or
runs into other types of difficulties, a typically hands-off investor
is likely to become more closely involved with the management of the company
to ensure its prospects are turned around. ·
Exit options for investors
Venture capital investors and shareholder management teams are looking
at some point to sell their investment or seek a stock market listing
in order to realise a capital gain. Venture capital firms usually also
require an exit route in order to realise a return on their investments.
The time frame from investment to exit can be as little as two years or
as much as ten or more years. At the time of exit, the venture capital
firm may not sell all the shares it holds. In the case of a flotation,
venture capital firms are likely to continue to hold the newly quoted
shares for a year or more.
The options
The five main exit options are listed below. If you are considering any
of these, you will need the specialist advice of experienced professional
advisers.
Trade sale
The sale of your company’s shares to another company, perhaps in
the same industry sector.
The majority of exits are achieved through a trade sale. This often brings
a higher valuation to the company being sold than a full stock market
quotation, because the acquirer actually needs the company to supplement
its own business area, unlike a public shareholder.
Repurchase
The repurchase of the venture capital investors’ shares by the
company and/or its management.
To repurchase shares you and your advisers will need to consult the Companies
Act, which governs the conditions of this exit option. Advance clearance
from the Inland Revenue and professional accounting and tax advice is
essential before choosing this route.
Refinancing
The purchase of the venture capital investors’ or others’
shareholdings by another investment institution.
This type of exit may be most suitable for a company that is not yet willing
or ready for flotation or trade sale, but whose venture capital investors
may need an exit.
Flotation
To obtain a quotation or IPO on a stock exchange, such as the Official
List of the London Stock Exchange, AIM or NASDAQ (USA).
A stock market quotation has various advantages and disadvantages for
the entrepreneur.
Involuntary exit
Where the company goes into receivership or liquidation.
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