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7 Exit Strategies for Investors in New Zealand Start Ups With Share Schemes 

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Investing in start ups that are in their early-stages can be an exciting venture, especially in a thriving start up landscape like New Zealand. However, it is critical for investors to carefully assess likely opportunities for a future exit to ensure the relevant start up’s growth and exit strategy aligns with theirs. This article will take you through seven exit strategies designed for start up and new business investors.  

Why Do I Need an Exit Strategy?

Exits are how investors gain a return on their investment in a start up. Typically, high growth startups will not reward investors by regular payment of dividends (instead re-investing all available funds in its growth strategy) and, rather, investors focus on the longer-term goal of an attractive exit. It is important that both the company and its investors are aligned on what this strategy looks like. Below we discuss several possible exit strategies that may appeal to your investors.

1. Initial Public Offering (IPO)

One of the most familiar exit strategies is where the start up undergoes an Initial Public Offering (IPO). Through an IPO, the start up offers its shares to the public for the first time. Investors are then able to buy and sell shares on the open market.

An IPO provides an opportunity for early investors to gain significant returns. However, achieving an IPO is not guaranteed and only a small number of start ups will successfully grow and undertake a successful IPO. IPOs can be complex and require compliance with extensive regulatory requirements (both for the IPO itself and in terms of ongoing compliance).

2. Full Acquisition

A common exit strategy for start ups in New Zealand is by way of an acquisition. In an acquisition, another company purchases the start up (either by way of buying the assets or shares of the relevant company), enabling investors to see a return on their investment, enjoying the (assumed!) uplift in value since the date of their investment. 

3. Capital Raise

Start ups may, as an interim measure, undertake a capital raise to bring in further capital to assist in continued growth. As part of the raise, existing investors who invested in previous rounds may be offered the option to sell their shares (in full or part) to the incoming investors as part of the capital raise, allowing them to benefit from the return on their investment and “refreshing” the investor base of the company.

Secondary market sales provide investors with liquidity before an IPO or full acquisition occurs. 

4. Redemption Rights

Redemption rights are contractual provisions that allow investors to sell their shares back to the start up under specific conditions. Also known as ‘buy-back rights’, these conditions are often outlined in the start up’s shareholder agreement.

Redemption rights can protect against a lengthy exit process for investors in start ups, enabling an exit at a predetermined price and time. Further, redemption rights also provide a degree of predictability. 

However, the terms of redemption rights must be negotiated and agreed upon when investing in the start up. Further, start ups will not always offer this option. As such, investors should carefully review the terms of redemption rights when first investing in a start up to ensure they align with their financial goals and timeline.

5. Convertible Note Redemption

Convertible notes are a common method of financing for start ups. This method typically allows investors the option to either convert their debt into equity, or have their investment amount returned (including interest accrued) when certain conditions are met and, in other scenarios.

Investors should work closely with the start up’s founders to understand the terms and conditions of the convertible note and ensure they make a timely decision regarding if and when they wish to make this conversion.

6. Dividends

Although most investors focusing on high growth start ups are primarily seeking quick exits and high returns, some may choose to invest in more stable, steady growth, long-term companies and reap the benefits of dividends. Of course, this is contingent on the relevant company being profitable. 

Investors should carefully assess the company’s business model and growth prospects before considering an investment of this kind (as well as considering its own exit strategies/investment requirements) to ensure adopting this approach is appropriate and a viable use of funds. Of course, holding shares and collecting dividends will require a much longer term commitment than other exit strategies.

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Key Takeaways

While investing in New Zealand start ups can be rewarding, investors should always consider and ensure that the target company’s exit strategies align with their own expectations of their investment commitment. Some common exit strategies adopted by companies include:

  • Initial Public Offering (IPO);
  • full acquisition;
  • secondary share sale;
  • redemption rights;
  • convertible note redemption; and
  • dividends.

If you need help understanding what is the best exit strategy for you in regard to your NZ start up investment, contact our experienced business lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page

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Emily Young

Emily Young

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