How startups exit

Startup shares are hard to sell. You cannot sell them on a stock exchange, and the company does not pay dividends. Thus most founders get money from their shares only once, at the exit. An exit is the event that changes private shares into cash, or into stock that you can sell on a public market.

Northwind Labs, the company of Ada and Ben, gets an offer. A large software company says that it will buy Northwind for $120M. Ada and Ben own 46.15% of the shares. Before you continue, make a guess.

Predict first

A buyer says that it will buy Northwind for $120M. The founders own 46.15% of the shares. How much cash do the founders get on the day that the deal closes?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

The ways to exit

Startup shares have five main outcomes. Each outcome pays different persons, at different times:

Exit	Who pays	Who gets cash	When
Acquisition (M&A)	A buyer company	All shareholders, through the waterfall	At closing, plus later payments
IPO	Public investors	The company gets new money. Insiders sell later.	After the lockup, usually 180 days
Direct listing	Public investors	Shareholders who sell on the exchange	From the first day on the exchange
Secondary sale	A new investor	Only the holders who sell	When the sale closes
Shutdown	No buyer: the cash that the company has	Creditors first, then preferred holders, then common holders	When the company closes

Acquisitions are much more frequent than the other good exits. But the most frequent end of a venture-backed startup is a shutdown.

Acquisitions

In an acquisition, a different company buys your company. A strategic buyer is a company with its own business that wants your product, your customers, or your team. A financial buyer, usually a private equity firm, buys the company as an investment.

The charter of a venture-backed company treats a sale as a deemed liquidation event. Thus the sale price goes through the waterfall: the investors’ preferences come first, and the common holders get the rest. Before that, the headline price goes through four more steps: the form of payment, the escrow, the earnout, and debt and fees.

Cash or stock

The buyer can pay with cash, with its own stock, or with a mix of the two. Cash is sure. Buyer stock can increase or decrease in value before you can sell it. If a buyer pays you $10M in its stock and its share price then falls 30%, you hold $7M.

Escrow

The buyer keeps part of the price in a locked account, the escrow. This money pays for problems that the buyer finds after closing, for example a tax bill that the company did not pay. If no problem occurs, the sellers get the money after the survival period, usually 12 months.

Deal value          $100M
Escrow (10%)       −$10M
Paid at closing      $90M
Paid at month 12     $10M minus claims

In 2025 deals that had a general indemnity escrow, the SRS Acquiom median escrow was 10% of the deal value. But approximately 44% of 2025 deals had no general indemnity escrow. Often, the cause was that the buyer bought representations and warranties insurance. That insurance pays the buyer for some problems, so the escrow can be much smaller.

Earnouts

An earnout is a part of the price that the buyer pays later, only if the business gets to targets after the sale. Revenue goals are a frequent target. An earnout closes a gap when the buyer and the seller do not agree on the value.

A frequent founder mistake is to count the full earnout as money. A “$120M” deal can be $100M at closing plus “up to $20M” if the company gets to its revenue targets in two years. The press release says $120M. The sellers can get $100M.

Read the two numbers carefully. 52% is the part of earnout deals that paid something. 21% is the part of all promised earnout dollars that buyers paid. Thus a fair value for your plans is approximately $4.2M for a $20M earnout, not $20M.

Debt and fees come first

The sale price first pays the company’s debt. Then it pays the bankers and the lawyers. Only the rest goes to the shareholders. A $120M price for a company with $5M of venture debt and $3M of deal fees gives the shareholders $112M at most.

Now move the deal terms yourself. The widget uses Northwind’s cap table, with three series of preferred stock. It does the waterfall for you at each payment.

Calculator

From the headline price to cash

A buyer offers $120M for Northwind. Change the deal terms and see what the shareholders get, when they get it, and what the founders keep.

Headline price$120M

Earnout, maximum

Part of the headline. The buyer pays it later, only if the company gets to its targets.

Part of the earnout the buyer pays21%

Buyers paid 21% of the maximum earnout dollars in SRS Acquiom data.

Escrow10%

Median 10% of the deal in 2025 deals that had one.

Escrow that the buyer keeps for claims0%

Company debt and deal fees

Paid from the closing price, before any shareholder.

The buyer pays with

Headline: $120M
Shareholders get: $104.2M; 86.83% of the headline
Founders get: $40.47M; If all $120M came at closing: $49.09M
Shortfall: $8.62M; for the founders, against the headline

When the money arrives

Payments from the buyer to the shareholders
Payment	Month	Amount	Founders so far	Paid so far
At closing	0	$90M	$32.73M	$90M
Escrow release	12	$10M	$38.18M	$100M
Earnout	21	$4.2M	$40.47M	$104.2M

The founders' payout

On the headline: $49.09M
At closing: $32.73M
At month 12: $38.18M
At month 21: $40.47M

The headline says $120M. The shareholders get $104.2M over 21 months: $90M at closing, $10M when the escrow ends, and $4.2M from the earnout.

The founders get $40.47M, $8.62M less than the $49.09M that the headline suggests.

Look at the gap between the founders’ payout on the headline and the payout in fact. With the default terms, the founders get $40.47M, not $49.09M. Then select “Half stock” and move the share price change. A 30% fall in the buyer’s stock removes 15% of the value of each holder.

Work it out

A buyer offers $80M at closing plus an earnout of up to $15M. The escrow is 10% of the closing price. How much do the shareholders get on the closing day?

Work it out

Use the SRS Acquiom average payout of 21% of the maximum. What is a fair value for your plans for the $15M earnout in the same deal?

Acqui-hires and license-and-hire deals

In an acqui-hire, the buyer wants the team, not the product. Frequently, the buyer stops the product, and the price is small. Investors frequently get approximately their money back, or less. Founders and employees get new jobs and retention packages, but often little for their shares.

Here is a typical case. A buyer pays $8M for a company that raised $10M of preferred stock. The preferred holders get all $8M. The founders get $0 for their common stock. But they get a bonus to join the buyer and new buyer stock that vests over four years. That money pays for future work, not for the company that they made.

A reverse acquihire goes one step further. A large company hires the founders and key staff and pays the startup a license fee for its technology. It does not buy the startup. The startup uses the fee to pay its investors.

IPOs

In an IPO, the company sells new shares to the public and lists on a stock exchange. Investment banks, the underwriters, sell the shares to investors. Before the IPO, the company files a registration statement, the S-1, with the SEC.

An IPO changes the waterfall completely. Under the NVCA model charter, all preferred stock converts to common stock automatically at a “Qualified IPO”. The liquidation preferences stop, and every holder has the same type of share.

But an IPO does not give insiders cash on the first day. Founders, employees, and investors usually agree to a lockup: they cannot sell for 180 days. The share price can fall during that time:

Your shares                    6,000,000
Value at the $30 IPO price     6,000,000 × $30 = $180M
Price at the end of lockup     $18
Value when you can sell        6,000,000 × $18 = $108M

Direct listings and SPACs

There are two other routes to a public market:

In a direct listing, the company lists its current shares without an underwritten sale of new shares. Current shareholders sell directly to the market, and usually there is no lockup. This route is for well-known companies that do not need new cash. WilmerHale counted nine direct listings in 2025, one in 2024, and four in 2023.
A SPAC is a shell company that raises money in its own IPO, then merges with a private company. The private company becomes public through the merger. SPAC deals usually have 365-day lockups.

SPACs became active again in 2025, with 144 SPAC IPOs that raised $26.8B (WilmerHale). The SEC made stricter SPAC rules on January 24, 2024. Under these rules, SPACs must disclose more about dilution, sponsor pay, and conflicts. A SPAC can also give less cash than it promises. If a SPAC has $200M in its trust and its shareholders redeem 80%, the company gets only $40M.

Secondary sales and tender offers

A secondary sale gives cash before an exit. A shareholder sells current shares to a new investor. The company issues no new shares and gets no money. A tender offer is an organized purchase of shares by the company or by outside investors. The buyer offers one price to many holders for a set period. US rules say that a tender offer must stay open for at least 20 business days (SEC Rule 14e-1).

Secondary buyers usually pay less than the last round price, especially for common stock:

Shares sold              200,000
Last preferred price     $15.00
Secondary price          $12.00   (a 20% discount)
Cash before tax          200,000 × $12 = $2.4M

Boards control secondary sales closely. The lesson on secondaries tells you why.

Shutdowns

A company that closes pays its creditors first. Then the cash that stays goes through the waterfall, so the preferred holders get it before the common holders. For most failed startups, that cash is small or zero. SimpleClosure data from January 2025 showed that 60% of failed startups did not have sufficient capital to return money to investors.

Carta counted 966 shutdowns among its customers in 2024, against 769 in 2023. Carta says that its count is too low, because some companies close their accounts and give no reason. SAFE holders have special rules when a company closes. The lesson on SAFEs in a sale or a shutdown gives them.

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In 2025, which outcome was most frequent for US venture-backed companies, by WilmerHale counts?

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