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June 21, 2023
Startup investors don’t normally receive dividends from the startup. Instead, investors make their returns through the value of the shares they own in the startup. The return is made once a startup exits. In a successful deal, a startup exit is usually when the startup is either acquired by another company, or lists on a public stock exchange.
In a loss making scenario, a startup exit is when the startup folds and investors are entitled to whatever assets (usually little) are remaining of the startup. A startup could also be bought out at a discount by another company – this would also result in a loss for investors who paid more than the buyout price when they bought the shares.
An exit event normally happens between 5-10 years after investment, although startups typically fund-raise every 12 – 18 months and so investors may see the value of their shares change as the startup’s valuation changes. This will also mean you own less of the company over time as more shares are issued, however, which is a process known as dilution. There are occasionally exit opportunities at these fundraising rounds. Startups are however usually accommodating where you find your own buyer to your shares – though buyers are not typically easy to find.