Methods of EXIT through IPO and M&A

Both founders of venture companies and investors who invest in such corporations act with the aim of making a profit. However, there isn’t just one way to make a profit, and various methods can be considered. In this article, we will explain the methods of EXIT through IPOs and M&As, which are representative ways for founders of venture companies and investors to make a profit.

What is an EXIT?

An EXIT is a concept used in venture businesses and corporate restructuring. It refers to the process where founders of startups, investment funds, venture capitalists, and other investors recover their invested capital and ultimately make a profit through the sale of shares or M&A activities. Simply put, it’s the process where founders and investors of startups make a profit through their investments in these ventures. The term EXIT is also sometimes referred to as “Harvesting,” which carries the meaning of reaping a yield.

Methods of EXIT

There are primarily two methods of EXIT to consider:

• EXIT through Initial Public Offering (IPO)
• EXIT through M&A (Merger and Acquisition)

EXIT through Initial Public Offering (IPO)

The first method to consider is EXIT through an IPO.

What is an Initial Public Offering (IPO)?

IPO stands for Initial Public Offering, also known as stock listing, public offering of shares, or new public offering. It refers to the process of listing shares on a stock exchange, making the shares publicly available, and allowing anyone to underwrite the shares.

https://monolith.law/blockchain/comparison-ico-ipo[ja]

The Mechanism of EXIT through an IPO

First, let’s consider from the perspective of the founders of venture companies. Naturally, the founders of such companies hold a large number of shares in the company. When an IPO is conducted, the value of the shares generally increases significantly. As a result, the founders of venture companies can profit by selling their shares at the high share price after the IPO. Next, let’s consider from the perspective of investors such as venture capitalists (VCs).

Initially, investors such as VCs judge whether a venture company is likely to grow in the future based on its business content and other factors. If they judge that the company has potential for future growth, they invest in the venture company and underwrite its shares. At this stage, the company is still in its growth phase, so investors can underwrite shares at a relatively low price. Depending on the situation, they may provide support such as advice to the management team of the venture company, aiming for the company’s IPO. Then, investors can profit by selling the shares they underwrote at a relatively low price before the IPO at a high share price after the IPO. This is how EXIT is achieved through an IPO.

Advantages of EXIT through an IPO

The major advantage of EXIT through an IPO is the potential to make a large profit. If you are a founder of a venture company, you have underwritten a large number of shares at an extremely low price. Also, if you are an investor like a VC, you may be able to underwrite a large number of shares at a very low price if the venture company is just starting up. If the initial investment is low, there is a possibility of making a large profit by selling the appreciated shares.

Disadvantages of EXIT through an IPO

The disadvantages of EXIT through an IPO include the risk of not being able to EXIT. To conduct an IPO, the venture company must grow to a state where it can withstand listing examinations, but there are not a few cases where it cannot grow to that state and has to give up on the IPO. In such cases, it is naturally impossible to make a profit by EXITing through an IPO. Also, it takes a lot of effort to take a venture company public. The fact that it takes a lot of effort to EXIT through an IPO is also a disadvantage of EXIT through an IPO.

EXIT through M&A

The second method to consider is EXIT through M&A.

What is M&A?

M&A stands for Mergers and Acquisitions, which refers to the merging and acquisition of companies. Depending on the context, the concept of M&A can also include corporate alliances.

https://monolith.law/corporate/merger-acquisition[ja]

The Mechanism of EXIT through M&A

M&A is a method of selling a company or its business to make a profit. Specifically, you grow the company, increase its value, and then sell the company or its business to make a profit.

The Advantages of EXIT through M&A

One of the advantages of M&A is that you can EXIT even without reaching an IPO. There are many cases where the value of the company has increased, but it does not reach an IPO. In such cases, you can make a profit through EXIT by M&A. From the perspective of investors such as VCs, they can definitely divest their shares, avoiding the risk of not finding a buyer for the shares.

The Disadvantages of EXIT through M&A

One of the disadvantages of EXIT through M&A is that the management rights shift from the current management team to a new one. Even if the management rights are transferred, it is not particularly disadvantageous from the perspective of investors such as VCs, but for founders of venture companies, etc., there is a possibility that they will not be able to be involved in management thereafter, so this point is considered a disadvantage. Another disadvantage of EXIT through M&A is the risk of information leakage. When conducting M&A, the acquiring side does not decide to acquire without any investigation, but conducts thorough due diligence (DD), etc., and decides to acquire. At that time, the selling side needs to provide certain information to the acquiring side, which may lead to the risk of information leakage. To prevent such information leakage, it is important to properly conclude a confidentiality agreement.

Another disadvantage of EXIT through M&A is the need to take care of employees. Depending on the contract content of M&A, the transfer of contractual relationships with employees may also be included in M&A. In that case, changes in the work environment and previous employment relationships may occur, which may make it difficult for employees to work. Employees are important assets for the company, so the need to take care of employees is considered a disadvantage.

Summary

We have explained the methods of EXIT through IPO and M&A. Both founders of venture companies and investors who invest in such companies generally share the common goal of making a profit from their investment. Therefore, understanding the methods of EXIT can align the interests of both the founders of venture companies and investors. It is crucial to first understand the typical methods of EXIT, namely IPO and M&A. Knowledge of the ‘Japanese Company Law’ and other specialized knowledge is required for the methods of EXIT through IPO and M&A. If you have any concerns about understanding the methods of EXIT through IPO and M&A, please consult a lawyer.