Startup Exit Strategy

Startup Exit Strategy: Founders can plan their exit—or ignore it till it happens and maybe face unexpected challenges. If you have to urge to start a business, why give a moment’s attention to how it will end, at least for you! Many entrepreneurs have no choice, since a high proportion of startups fail. However, I contend that part of a founder’s role is to envision the new venture’s maturity and consider options for the longer term, even in the early days.

Thinking ahead is part of the successful entrepreneur’s nature. When planting a sapling, it’s no good simply thinking about today’s context, for it will grow much bigger and thought needs to be given to it being the right tree in the right place. It needs to be the right zone and and climate for the tree to flourish. For it’s eventual size, space must be sufficient. What sun or shade conditions will be right? Is the tree’s purpose shade, fruit, or beauty?

Thinking about startup exit strategy is not normally what entrepreneurial writers spend time worrying about. However there are many benefits for a startup exit strategy, even if it’s not a major item on the agenda, like the product, the market and the money. There are three main reasons for this:

1. The concept for the longer term is likely to help shape decisions in the early years and avoid those that will get in the way of the realization of the end-game;
2. Assuming the survival of the venture, it will be important that the near, plus far horizons and aspirations are a good fit;
3. Thinking far out will make a significant contribution to the definition of the deep purpose of the startup in the short and medium term. It will also help not only the founders, but also the growing team, to commit to the vision and it’s realization.

Startup Exit Strategy: Good Business as Well as Good Planning

Good business practice includes having accurate and up-to-date documentation, accounts and other data. Of course! Housekeeping can be tedious and an ‘Exit Readiness’ list as part may seem heavy-duty, since founders do not often show an interest in logging information beyond the numbers. The first five categories on the list can be considered tangible. The others will mainly be seen as more qualitative, but nonetheless real:

• Capital: founder/employee/external equity; shareholder record, debt to equity convertibles; lender share options.
• Governance: incorporation documents; articles of incorporation; decision making rights.
• Financials: monthly up-to-date & last 3 years; cash-flow & a/cs payable/receivable; KPIs and forecasts.
• Assets: physical/material, products (market value as well as stock/WIP).
• Legals: IP ownership, trademarks & patents, software & open source licenses.
• Operations: documented SOPs, processes & procedures
• Employment: skills, policies, incentives, agreements, culture e.g. turnover/evidence of commitment/exit interviews.
• Reputation: customer longevity, user feedback/surveys/ratings, market position.

Founders Have Many Startup Exit Strategy Options

The most widely employed exit options are four main means of exit: a) selling the company; b) merging with another company; c) IPO—selling the company’s equity on a public market; or d). management buyout, though this latter means would generally apply to much larger companies, often with an already significant number of outside shareholders/investors.

If founders do not have a startup exit strategy, they can simply ‘walk away’ by putting the business into liquidation or by declaring a bankruptcy—accepting failure, although there are somewhat positive ways to use these two methods by: extracting assets; retained earnings.

Or, on the other hand, as my co-founder and I did 11 years after we started, founders can actually sell the equity to employees for a nominal sum. That would probably assume that founders have made provision for what they anticipate comes next.  Over the years, we had paid ourselves at market rates, except in the first couple of years—and granted ourselves dividends/insurance for annuity conversion, enough to fund a comfortable next step. Though we did not have the opportunity to do so (in the last century!).

Preserving the purpose of the venture, the L3C¹ structure in 11 US States, now provides the opportunity to create a low-profit company, to enable the institutionalization of the purposeful objectives of the business. It will not suit every venture, especially the high investment ‘unicorns’. For many less scale oriented startups, it’s a way that is not only a safeguard of values, but it tells stakeholders about the essential nature of the company they’re involved with.

These are the main creative ways to go.

1. Inter-Generational/Legacy/Family Succession Exit

This is most likely for enterprises either created as a small-scale ‘mom-and-pop’ business, or one with a founder who has very determined ideals or vision² and hopes that they will be perpetuated. In the latter case they can go smoothly or with next generational bickering, and as the saying goes, ‘shirtsleeves to shirtsleeves in three generations’.

Examples of the long-lasting ‘family business include: the Ford Motor Company³ the first that comes to mind; Mars—still owned by three main branches of the founding family after 100 years (Mars was my first post-startup client); founded in 1918, is C&S Wholesale Grocers based in Keene, New Hampshire and still owned by the founding family.

2. Startup Exit Strategies for Purposeful Founders

Clearly it’s important to start as you mean to continue. It helps a great deal therefore to choose a business structure that will help to facilitate later developments. For example, the life of a purpose driven startup will be greatly facilitated by starting out as, or converting to Benefit Corporation registration, whose legally structured goals include making a positive impact on society. Equally in its early days, such a company would do well to seek certification as a B Corporation. You might decide to establish your startup as a worker-owned cooperative, or just a plain old co-op. I was on the board of a large food retailer co-op for three years, where both the kinds of people who worked ans shopped there were committed or at least in favor of the purpose of the business.

There are a number of new forms of business structure being established in the US (and around the world). An example is one used by Yvon Chouinard when he decided to move on at the age of 83 from Patagonia, the company he had established many years before. The Patagonia Purpose Trust⁴ was created solely to protect our company’s values and mission. It owns all of the voting stock of the company, which gives it the right to approve key company decisions, like who sits on the board of directors and what changes can be made to the company’s legal charter, including its reason for being, and B Corp commitments.

3. Management Buyout (MBO)

A management buyout enables a company’s management team to buy their company’s equity/assets/operations. The selling founder may have an interest in partially funding the buyers, or retaining a minority holding, thus reducing the cost to the buyer-managers. A startup exit strategy will have helped its implementation.

Generally it involves the founders having led a strong and supportive group of people, who are already committed to the business having been part of its development. From the selling founder’s point of view, an MBO is more likely to perpetuate the founding values and purpose. The financing can be either debt, equity or personal finance, or a combination of them. Naturally both parties will want to seek outside advice, which can be from attorneys, accountants, or investment firms, who might have both an advisory role and an opportunity for investment.

There is also the possibility of a MEBO, where the ‘E’ stands for employees. It is different to an Employee Share Ownership Program, described below. There is also a Management Buy-In, where an outside team of managers take over the business on a similar basis.

4. Sale of the Business by Earnout

When you sell your business by earnout, you gets the agreed sale price for the company plus additional future payments for hitting agreed financial targets during the earnout period. There are several mutual advantages to such an exit. The valuation process for the sale of a business is always hard. The seller can make claims of future sales forecasts that may appear ‘iffy’ to the buyer. On the other hand the buyer has not been managing the business and is less likely to be confident in the numbers. Through an earnout, the seller has to stick around for the specified period, and from an inside view has to be confident of the old guard to make the numbers—so there’s no question of a ‘cut and run’ sale.

My personal experience from trying to agree an earnout with a fellow business across the Atlantic Ocean was not so much the sale price, which we nearly reached, but the conditions that the buyer wanted for the earnout period. In this case, the biggest issue concerned what seemed an innocent demand: the buyer wanted to determine whom the business should hire in key posts during the two or three years of the earnout period. For us that was a sticking point because the price of the sale would depend upon staff appointments over which we had no control, and thus we might be unable to meet the contract terms.

5. Employee Share Ownership Program (ESOP)

An ESOP is similar to and different from a business initially created from the start as a Cooperative, or Workers’ Cooperative. Such a program could be by selling equity to staff or, in fewer cases, by donating shares to employees. It’s also a IRS qualified retirement plan. Employers sometimes use them to align the interests of their employees with those of their shareholders. An ESOP is generally part of a long-term plan envisaged as part of a startup exit strategy.

I recommend that any founder considering this exit route would gain a lot more information from the National Center for Employee Ownership (NCEO). Things I did not know before visiting the NCEO website include what an Employee Ownership Trust is (more common in the UK that the US), the names of some well-know or big US ESOP businesses, how to find ESOP companies in one’s locality. The site could lead you to useful companies to approach for advice, if you are considering that route for an exit.

6. Equity Crowdfunding as a First Step Towards Exit

Equity crowdfunding is a fast growing means of startup funding. If you need to know more about equity crowdfunding there are three places on the Venture Founders site where I offer more information: Equity Crowdfunding for Purposeful Startups; Equity Crowdfunding Directory—USA; and Equity Crowdfunding from Friends and Family.

One of the significant advantages in using equity crowdfunding at, or soon after, startup is that the appeal for finance is made to people you know (family, friends, employees, customers, suppliers, locals—in fact any stakeholders), or people who are drawn to your product or service, or the purpose you have. So for example, if you have a ‘green’ strategy, or one that appeals to specific interest groups, the investors will already be ‘on your side’. This will tend to contrast with those investors whose motive is purely for return on investment.

Understanding Exit Scenarios in Equity Crowdfunding is an excellent article from Shark Ponds, a site that “believes crowdfunding is more than just raising money—it’s a bold expression of innovation, collaboration, and the pursuit of ideas that can change the world.” They echo my advice about the importance of startup founders “should contemplate the endgame. Exit planning influences company strategy, capital structure, and growth milestones, directing entrepreneurial focus toward value-creation events that appeal to acquirers, public market investors, or strategic partners”.

A Startup Exit Strategy Will Limit Risks to Values

A startup exit strategy helps founders, at the very least, to be aware of these kinds of eventual options. Business exits by by founders of purposeful companies that do not have external shareholders, have the best chance of maintaining  the espoused purpose, especially those which have grown only modestly. On the other hand, large ventures with external shareholders have a much harder time of it. For instance, Ben Cohen co-founder of Ben & Jerry’s, the fabled ice cream company was quoted by the New York Times as saying, “Getting [purchased] by a huge multinational works against what I believe is needed to create a more equitable society.”

Ben & Jerry’s, founded in 1978, had grown both in stature and scale, when in 2000, Unilever purchased the company. The individual outside shareholders who had earlier bought small numbers of shares from the founding shareholders, did not have the strength (maybe not the inclination either) to maintain the company’s independence and purpose commitment. Also the judgement at the time was that a company’s duty was exclusively to its shareholders and thus Unilever was able to outbid a rival offer that was made by Cohen and Meadowbank, a financial ally that he had brought on board.

Even though the concept of steward ownership is much more widely accepted today, 25 years ago it was a pipe dream. In any event though Ben and Jerry’s sale to Unilever went through, albeit with an Independent  Social Mission Board in place. In 2025, the company’s values and purpose are once again under threat following the parent company’s decision to spin off their ice cream operations into a separate company, Magnum, itself valued at nearly $8 billion.

However, there is still debate in the US as to whether a public company has a legal obligation to operate in the shareholders’ interest exclusively and to maximize profit. The lengths to which Patagonia’s Chouinard went to protect the founding vision and purpose of the business shows just how hard it is to grow the business exponentially and stick to a deeply considered and ingrained purpose. This is especially true for a quoted one.

However, there is an enormous wave, both in the US and internationally, to change and re-codify the objectives and functions of the quoted business corporation. We have a long way to go, but we are well on the way to redefining what it means to be in business and what society expects from the business world.

---

Startup Exit Strategy: Notes

1. L3C Explained: The Hybrid Structure Combining Profit and Social Purpose.
2. Examples could include shared ‘social capital’, where family and community share ideals; a startup where the founder(s) have continued in leadership over a long period and have already hired family members with shared values; management practices where the long-term has been considered mote important than the ‘quick buck’.
3. In 2025, Ford Common Stock is over 64% owned by institutional shareholders. The Ford family’s voting power is tied to their Class B shares, which are worth about $1.8 billion and held by descendants of company founder, Henry Ford. Class B shares are controlled by the Ford family, who hold a significant majority of the voting power.
4. A Purpose Trust is a type of trust which has no beneficiaries, but instead exists for advancing some non-charitable purpose of some kind.