When Google went public in 2004, it didn't just make waves — it created a tidal wave of millionaires!
Picture this: a bunch of early Google employees high-fiving each other as they cashed in their stock options, practically swimming in money, and early investors who had secured the future of their great-grandchildren.
Among them was also Jeff Bezos, better known as the founder of Amazon. His investment worth $250,000 had translated into a staggering $280 million in value when the initial public offering (IPO) happened.
Much like other successful startup IPOs, Google too was an example of how a liquidity event can create the kind of wealth that transforms lives. The kind of wealth that makes you pinch yourself to check if you're dreaming.
And while an IPO is among the most sought-after liquidity events in the broader startup ecosystem, it’s not the only one that matters.
What are the different types of Liquidity Events?
Let’s understand IPOs first
When an IPO occurs, a company goes from being owned privately to having its shares trade on a stock exchange. New shares are issued and made available to the public.
It’s almost always a dream for most startup founders to reach this stage as it signifies that the company has been able to prove its business model, and is on the way to becoming a blockbuster success.
As a liquidity event for existing shareholders, this marks an opportunity to sell their shares in the open market, albeit with a lock-in period of 6-12 months.
This is done so that too many shares don’t get dumped into the market at the same time and leads to a significant fall in share price.
Acquisitions
When a company is acquired, it may end up being a liquidity event for employees and investors as well. While a lot depends on the terms of the deal and the circumstances in which the acquisition is happening (a failing company may not do much for anyone involved), the larger ones you see in the news are more than likely to make a lot of money for all stakeholders.
Case in point the $16 billion acquisition of Flipkart by US retail giant Walmart, wherein the latter was said to have bought shares worth $800 million from Flipkart employees.
In some cases, instead of handing out cash, stakeholders are given equal shares of the acquiring company.
Buybacks and Secondaries
For most startups, both the above scenarios may take a looooooooooong (add a few more Os) time to happen. What happens then to employees, who, unlike VCs, are not operating a 7-10 year horizon to make money?
Enter buybacks, where startups use excess cash in hand to reward employees by buying vested and exercised options back from them at the current valuation.
There’s also secondaries where something similar happens, but the shares are bought by a new investor instead.
Secondary transactions also allow existing and early investors to get liquidity.
How long do employees have to wait for liquidity?
If the above examples are anything to go by, we’d say there’s no definite answer.
Given that we are in the middle of a recession where startups are finding it hard to raise funds, liquidity may even be a distant dream. But that doesn’t mean all hope is lost.
As the dust settles and investor sentiment improves, things will get better.
But even then, wealth creation via startups doesn’t happen quickly, and may only truly be rewarding to those who decide to dig into a company they believe in, and stay for the long haul.