Exit

An exit is the investor or founders leaving an investment by converting their shares into cash. Since a venture capital investor earns most of its return from the exit, exit routes and terms are regulated in the agreements from the first day of the investment.

Exit Routes

• Trade sale: Sale of all or a majority of the company to another company; the most common exit route.
• Secondary sale: The investor selling its shares to another investor or fund.
• Public offering: The shares begin trading on the stock exchange; subject to capital markets legislation.
• Buy-back: The founders or the company buying the investor’s shares after a set period.
• Liquidation: In case of failure, liquidation of the company and distribution of the remaining assets.

Exit Provisions in the Agreements

• Drag-along right: All shareholders joining the sale by majority decision,
• Tag-along right: The minority’s right to join the sale,
• Liquidation preference: The order of distribution of sale proceeds,
• Right of first refusal: Other shareholders’ priority to buy,
• Vesting acceleration: What happens to founders’ and employees’ unvested shares on a sale.

Legal and Tax Points to Watch

• Competition Board approval: Sales in which control changes hands require approval if the turnover thresholds are met; see Acquisition.
• Share purchase agreement: The sale is made through a share purchase agreement containing representations and warranties, indemnity and price adjustment provisions.
• Companies’ gains on sale: Part of the gain on the sale of participation shares held for at least two full years is exempt from corporate tax. For sales from 27 November 2024, the rate was reduced from 75% to 50%. The other conditions of the exemption (collecting the price on time, holding the gain in a special fund account) must also be met.
• Individuals’ gains on sale: Gains on the sale of shares in fully taxable companies held for more than two years are not taxed as capital gains. Gains on the sale of limited liability company shares, however, are capital gains regardless of the holding period. The position of joint stock company shares for which no share certificate has been printed should be assessed separately.