What is a liquidity event?
A liquidity event is an acquisition, merger, initial public offering or other event that allows the founders and first investors of a company to withdraw some or all of their shares. The liquidity event is considered an exit strategy for an illiquid investment – that is, for stocks that have little or no market to trade in. Founders of a business, of course, push for a liquidity event and investors along the way – venture capitalists, angel investors or private equity firms – hope or expect one in one reasonable time after initially making an investment. The most common liquidity events are initial public offerings (IPOs) and direct acquisitions by other companies or private equity firms.
Understanding liquidity events
A liquidity event is most often associated with founders and venture capitalists taking advantage of their start-up or start-up investments. The first handful of company employees should also reap the benefits of their IPO or buyout by another company that wants their product or service. In the case of an acquisition, the founders and employees of the company are generally retained. There would be an initial liquidity event, then additional compensation in shares or cash as they fulfill their contractual terms with their new owners.
It should be noted that in some cases, a liquidity event is not necessarily the objective of the founders of a company, although it is certainly intended for investors. The founders may not be motivated by the wealth that a liquidity event brings. Some founders have actively resisted calls from early investors to exit a public company for fear of losing control or ruining a good thing. In most cases, resistance is a temporary phase.
Often the timing of an IPO is under the control of the company. However, if a business has more than 500 individual investors and more than $ 10 million in assets, the Securities and Exchange Commission (SEC) is required to file financial reports for public consumption. This is called the 500 investor rule. Many believe this rule was one of the reasons why Google (now Alphabet Inc.) filed for publication, as the company was going to be forced to disclose its financial data to the SEC anyway.
Example of liquidity event
Mark Zuckerberg, his group of co-founders, and venture capital firms and individuals listed as major shareholders in filing Form S-1 before Facebook’s IPO in 2020 had a lot of thumbs up for its liquidity event . The company raised $ 16 billion during the IPO and started its first day as a publicly traded company with a valuation of $ 104 billion. Zuckerberg, who owned 28.2% of Facebook at the time, suddenly found that his net worth was around $ 29.3 billion. It was a liquidity event for the 27 year old.