Planning for Liquidity Events: What to Do After Major Funding Round or Exit

The U.S Open of Entrepreneurial Success

A major liquidity event represents a pivotal moment for any founder, entrepreneur, or early employee. Whether through a successful funding round or company exit, this sudden influx of wealth brings both tremendous opportunities and significant responsibilities. The decisions made in the months following such an event often determine the long-term impact of this financial milestone.

Imagine standing on the first tee at the U.S. Open. You’ve worked hard to reach this moment—a major liquidity event representing the culmination of years of dedication and strategic vision. Just as a professional golfer wouldn’t step onto that prestigious course without meticulously preparing every detail, you want to navigate this significant financial milestone with careful planning and the right team.

Personal Considerations: Understanding Your Liquidity Sources

Types of Liquidity Events

1. An initial public offering (IPO) provides a clear path to liquidity but comes with complexity. Lock-up periods typically restrict when you can sell shares, and you’ll need to carefully time your sales to comply with insider trading regulations while maximizing value. Market volatility can significantly impact your actual realized gains.
2. Direct acquisitions might provide immediate cash payments, offering clarity and certainty. However, they often come with earn-out provisions or employment agreements that tie portions of your payout to future performance or continued involvement with the acquiring company.
3. Secondary sales during funding rounds present opportunities for partial liquidity while maintaining significant ownership. These transactions require careful negotiation to balance immediate liquidity needs with maintaining appropriate equity stakes and voting rights.
4. Stock option exercises introduce timing considerations around tax implications and capital requirements. You’ll need to evaluate whether to exercise options before a liquidity event and how to fund any exercise costs.
5. Merger transactions often combine immediate payouts with future considerations. Understanding the terms of these deals, including any contingent payments or escrow arrangements, becomes crucial for financial planning.
6. Private equity buyouts typically offer clean exits but might include rollover requirements where you maintain some ownership in the new entity.

Personal Readiness Assessment

The emotional impact of sudden wealth often catches people off guard. Previous financial decisions might have been relatively straightforward, but managing significant wealth requires a different mindset and skill set. You’ll need to shift from focusing on wealth creation to wealth preservation and management.

Relationships can change dramatically when your financial situation shifts. Family members might expect financial support, friends might treat you differently, and colleagues’ perceptions may shift. Having clear boundaries and communication strategies becomes essential.

Your professional identity might need redefinition, especially if your role in the company changes or ends. Consider whether you want to start another company, become an investor, mentor other entrepreneurs, or pursue entirely different interests.

Are you ready?

Building the Right Foundation

A comprehensive advisory team can become crucial in navigating the complexities of a liquidity event. This team should include professionals who can provide specialized guidance across financial, legal, and strategic domains. The goal is to create a holistic support system that helps manage the multifaceted challenges of sudden wealth.

The financial planner serves as the primary strategic navigator, offering comprehensive guidance about wealth management, investment strategies, and long-term financial planning.

The tax professional becomes a critical defensive specialist, helping to minimize tax liabilities and ensure compliance.

An estate planning attorney works to protect assets, plan wealth transfer, and create legacy structures.

An insurance professional helps manage risk across personal and professional domains.

Each team member brings specialized expertise while working collaboratively. Together, they implement a comprehensive strategy that helps address immediate financial needs while positioning for long-term success and wealth preservation.

Determining How Much to Sell

Company Growth

Deciding the volume of equity to sell represents one of the most nuanced decisions in a liquidity event.

This is not a simple mathematical calculation but a complex strategic evaluation that requires understanding multiple dynamic factors. Companies at different stages of growth present unique opportunities and challenges that directly impact sale considerations.

Before deciding how much to sell, carefully evaluate your company’s future potential. For example, a business entering a high-growth phase might warrant maintaining a larger equity position.

Consider market conditions, competitive landscape, and industry trends. While past performance doesn’t guarantee future results, understanding your company’s growth trajectory helps inform optimal selling decisions.

Role Evaluation

Your ongoing role significantly impacts selling decisions. If you’re remaining in an operational role, maintaining significant equity aligns your interests with the company’s future success. Conversely, a larger sale might make sense if you’re transitioning out. Consider how your role might evolve over the next three to five years and align your equity retention accordingly.

Financial Needs analysis

A thorough analysis of immediate and long-term financial requirements becomes key in determining your sale strategy. This evaluation extends far beyond simple budgeting, representing a holistic approach to personal and professional financial planning.

Tax Minimization Strategies

While taxes should not be the main driver of your decision regarding how and when to achieve liquidity, they are a major factor in how much you can achieve with your wealth.

One of the main benefits of working with an advisory team early in the process to understand the potential tax consequences of a liquidity event is that it gives you more time and more options for implementing strategies to lessen the tax bill and maximize the amount of your wealth.

You also want to give your team adequate time to lay the groundwork for establishing any trusts, foundations, and other legal structures to execute your wealth management strategy.

Some tools for managing the tax consequences of a liquidity event include:

• Qualified small business stock exemption. This can offer a powerful mechanism for potential capital gains tax exclusions, providing a direct path to preserving more of your hard-earned wealth.
• Pre-transaction valuation discount for wealth transfer. This can present additional opportunities for wealth transfer planning, enabling you to create more tax-efficient structures for your newfound assets.
• Offsetting gains with charitable gifts. This emerges as another strategic approach, allowing you to offset gains while supporting causes meaningful to you.

Paths to Future Liquidity

Assuming you did not liquidate all your equity in the transaction, it is important to think about how you can eventually maximize the value of your remaining equity and convert it to liquid wealth in the future.

Completing another recapitalization or selling the company may certainly be an option.

While going public is the outcome many entrepreneurs anticipate, an IPO is a reality for only a handful of companies. In most cases, it is difficult to generate liquidity from stock in private companies because the stock is not registered with the U.S. Securities and Exchanges Commission, and the company imposes restrictions on reselling the stock.

As companies are staying private longer or delaying sales, they are looking for ways to allow executives and other employees to cash in on the value of their equity. Pre-IPO companies are increasingly taking steps to facilitate mechanisms that allow employees to unlock liquidity from their stock through:

• Stock buy-back programs
• Internal company stock exchanges
• Opportunities for employees to sell shares directly to outside investors
• Sales through private secondary exchanges

Closing Remarks

As we approach the 18th hole of your entrepreneurial journey, it’s time to assess the entire course you’ve played. Just like a seasoned golfer standing on the final tee, you’ve navigated hazards, made strategic shots, and now face the most critical moment of your round.

A major liquidity event is your championship moment—the culmination of years of dedication, strategic thinking, and relentless pursuit of your vision.

So, take a deep breath. Survey the course you’ve played. The 18th hole of your entrepreneurial journey awaits—and you’ve been preparing for this moment your entire career.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.