Why Use an Early Exit Deal Structure

Why Use an Early Exit Deal Structure

July 22, 2022 by investor

Startup Boards — Why Use an Early Exit Deal Structure

In startup funding, 65% of the investments after three years are still in business but are no longer on the venture track. 

In most cases, they are growing businesses but are not going to be bought out for a significant return to the investor.

The market conditions changed, competition took over, or the founder was no longer interested in keeping pace to achieve a venture exit.

The best-case scenario was the entrepreneur would sell the business for 2 to 3X after 10 years, in which case the investor would get a minimal return.

In my investing experience, three years into the investment, it becomes clear if the company will continue on the venture path or not.  

This was due to competition in the market, a difficult fundraising environment, or just plain poor performance by the company.

The entrepreneur signals their departure from the venture path by taking above-market rate salaries. 

I call this taking the “payroll exit,” in which case they no longer needed an “equity exit.”  

This leaves the investor stranded on the equity plan with no way out.

It’s very difficult to negotiate a buyout from the startup for the investor’s shares since there’s no market for setting the value.

An Early Exit deal structure gives the investor a way out of this situation which is far too common in the startup funding world.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.


Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Disclaimer:
Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.

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