Exit Risk Management

The whole point of investing in your business is to crystalise a profit at some point. The vast majority of investors are not investing in your business for a dividend income stream, like you might get from Telstra shares for example. Investors in growth stories are after a capital gain, and it is at the point of exit that this happens.

But what if the exit doesn’t happen?

There are a whole host of reasons why this may not happen as planned… didn’t manage to get the growth that you wanted which would have enabled you to have a second or third round of funding, or quite simply you didn’t want to sell or list in the end. Whatever the reason, the investor is potentially stuck.

One way investors manage this risk is to structure their investment in your business where their investment is repaid (like a loan) over the course of 3-5 years for example but still give them upside (like ordinary shares). This can be structured in many different ways. The essence of this post is that if an investor wants some protection no matter what it is, and the company is happy to give it, then it generally can be done.

Examples are convertible / redeemable preference shares. Though no voting rights are generally offered with preference shares, they get a fixed dividend % that is cumulative (of not paid in one year can be added to the next), repayable, and potentially convertible into full ordinary shares at a fixed price. All of which can leave the investor with minimal capital left in the business, and a slice of equity. Meanwhile you as the business owner have managed to fund your growth story successfully, facilitated by the financial support at an early stage and repaid it.  You are then repaying the investor for this support through a % of equity.