A startup should always consider what its “exit strategy” might look like. It’s important to be ready to exit when it’s least expected from a legal perspective, says Silicon Valley Lawyer Louis Lehot.
From its inception, a startup should always consider what its “exit strategy” might look like. This integral part of every startup’s business plan describes how the entrepreneur intends to “exit” his or her business, usually in a window of five to ten years. What that looks like can vary based on the founder’s goals – perhaps they will take the company public, sell to another investor or be acquired by another company. Even if the founders plan to run the company forever, having a well thought out exit strategy from inception is a crucial part of the plan.
While the exit strategy is important, problems can arise when an obsession with an exit strategy becomes bigger than all commitments to build a profitable business. Not every startup will raise venture capital, and not every startup needs to be acquired or sell itself to provide a return to founders, employees, and investors.
Companies that can establish a robust business model and scale might choose to stay independent and reinvest in the company’s profits. Part of those profits can also be distributed amongst investors as a dividend, providing liquidity to outside partners while avoiding the public markets and the obligations that come with it.
It is important to note that an exit strategy isn’t a strategy at all. A strategy involves a solid plan and its ultimate execution. It implies some direction and control over the outcome. In contrast, an exit requires a confluence of the right internal and external factors, many outside your control.
For example, if your ideal exit would be an acquisition, numerous factors have to fall into place to make that happen. An acquisition requires a buyer, who is willing to make an offer that you’re willing to accept, at the same time you’re ready to sell. Often a company loses control early on and let outsiders dictate their direction.
In another scenario, an exit can be forced. This can occur by taking VC funding or picking up debt on unfavorable terms where control of the company may be turned over. A company can also grow so large that they need to go public. Becoming a public company while preserving control is, of course, possible, but it’s infrequent. The best examples are Google and Facebook.
It’s no wonder startup founders sometimes sprint to the exit: growing a startup beyond stressful. An exit is a fast way to end this stress and become wealthy in the process.
But know this, even with all the right ingredients and a dash of good fortune, a successful exit may just not happen. To that end, the better strategy to focus on is building the most successful and highly profitable business that you can. Do that, and you will control your path, and if and when you get to decide to get acquired, it will be on your terms.
From a legal perspective, it’s important to be ready to exit when it’s least expected. Being ready means being able to open up a virtual data room that contains accurate, complete and timely records of your status, agreements and finances, and that reflects a strong business and a strong team. Digitizing with cloud-enabled, cyber-secure tech-enabled tools, and leveraging a good lawyer and accountant, will all help with that. Make sure each and every one of your employees and consultants (past and present) have signed confidentiality, proprietary invention assignment and at-will employment documents to ensure the basics. Make sure employees are not misclassified as consultants, especially in California. Stay away from contracts that restrict your ability to do business. Pay your taxes (payroll, franchise, sales and income). Know your value. Build a great advisor team. Ask for professional assistance.
Louis Lehot | Trusted Corporate and M&A Lawyer
Louis Lehot is the founder of L2 Counsel, P.C., an elite boutique law firm in Palo Alto, California, established to serve a gap in the market for innovators, disruptors, entrepreneurs and their investors with strategic solutions that make sense. Whether your company is two people just getting off the ground, or a large publicly traded company, Louis Lehot’s team has the experience and expertise to serve your interests. L2 Counsel specializes in representing high growth, innovative companies, helping them at all stages of development. From assisting with formation to financing, from seed or venture capital investors, to preparing for an exit, a public financing on a major international joint venture, Louis takes pride in assisting companies as they grow. Helping a business get big, go public, or get acquired, is his specialty. Louis has worked across sectors, from artificial intelligence, cybersecurity, fintech, enterprise software, real estate, life sciences, to clean energy technologies and projects. His broad experience uniquely positions him to provide tailored advice to drive outcomes for his clients. Louis is widely known for his expertise in cross-border transactions and has been a prominent business and legal leader in Silicon Valley. L2 Counsel is positioned to serve innovators across a wide range of sectors and Louis welcomes conversations to help ideas reach their growth objectives.
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