Exit Routes for the Investor

A capital investor will judge his investment by the return over a fixed period leading up to a private or trade sale, a Stock Exchange listing or other realisation of the value of the company. The investment will therefore be designed to encourage existing shareholders and/or directors, to achieve an optimum value after a certain period (e.g. usually between three and five years).

Exceptionally, existing shareholders might, at a later stage, refinance the company and buy out the investors, but they may experience difficulty in agreeing a value for the shares in these circumstances. In addition, legal restrictions on a company's ability to purchase its own shares may make this a complex or unattractive route.

You may also consider it appropriate to go public, either by going straight for a full Stock Exchange listing or going for the less demanding Alternative Investment Market (AIM). In this event, you can issue new shares to the public, sell existing shares or simply have your existing shares listed without any sale or new issue.

The advantages of going public include greater access to finance; increased market ability of company shares; a cash/paper benefit for the original shareholders and for executives through share options; and increased company profile and credibility.

The drawbacks include a greater regulatory burden, loss of control and the need to please institutional investors.

Venture capitalists often refer to investments as 'lemons' and 'plums'. The lemons, which turn sour, tend to ripen first. The plums ripen later and often provide spectacular returns. In between are the 'living dead'-which are solid and reasonably profitable without achieving the predicted growth success and are hence viewed unfavourably by the financiers.