How startups are sold

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When you invest in a startup, your return is only realised if the company achieves a successful exit. But exits are far from straightforward. They come in several forms, each with different implications for founders, employees, and investors.

In this week's episode of The Unsophisticated Investor, we’ll break down how startup exits actually happen. Who’s buying, what the process involves, and the different ways an outcome can ultimately unfold. We’ll also look at the risks that can erode investor returns, like liquidation preferences and dilution, and what to be aware of before investing in early-stage companies.

An exit simply refers to the point when early stakeholders convert their equity into cash or liquid assets. This typically happens in one of three ways:

1. Mergers & Acquisitions (M&A)

This is by far the most common outcome. A larger company acquires the startup - often to gain access to its technology, customer base, talent, or market position. These deals can range from acqui-hires and small strategic acquisitions to large-scale multi-billion dollar buyouts.

Acquirers are often incumbents in adjacent spaces looking for a competitive edge, or well-capitalised businesses seeking inorganic growth. For investors, this is the most frequent path to liquidity.

2. Initial Public Offering (IPO)

Once considered the gold standard for exits, IPOs are increasingly rare. Companies are choosing to stay private longer, largely because of the capital now available in private markets and the burden that comes with public market scrutiny.

Going public still happens, but it’s now mostly reserved for a small cohort of companies that meet a very high bar in terms of financial maturity, market opportunity, and investor demand.

3. Secondaries

In a secondary transaction, early employees or investors sell their equity to new investors before a full company exit. This offers partial liquidity along the way and has become very common, particularly in growth-stage startups, due to the lack of M&A activity and the IPO shutdown. For investors, it can be a useful option, but timing, pricing, and access can vary significantly. Although these issues are being worked on by a number of old and new players in the ecosystem.

The Process Behind a Sale

Selling a startup, whether to a strategic acquirer or through an IPO, involves several stages:

• Identifying potential buyers or public market readiness

• Positioning the business: strengthening financials, hiring, tightening operations

• Negotiation and due diligence: including valuation, terms, liabilities, and post-sale roles

• Legal and financial review: where investor protections (like liquidation preferences) come into play

For most founders, it’s a first-time experience that can be incredibly confusing and overwhelming. Investors who’ve been through multiple exits often play a critical role during these negotiations.

An exit doesn’t always guarantee a positive return

A key misconception is that any exit = good outcome. This isn’t always true.

Take liquidation preferences, for example. These clauses prioritise certain investors, typically institutional ones, when the proceeds from a sale are distributed. A 2x liquidation preference means a VC who invested €5M will receive €10M before any remaining funds are shared among other shareholders.

Selling happens long before the exit

Exit readiness doesn’t start the day a company receives an offer. Smart investors and operators are “selling” the business constantly by positioning the company for future partnerships, funding rounds, and hires.

At the growth stage, aligning with the right partners, building strategic alliances, or creating revenue synergies with other companies in the portfolio can significantly increase exit potential.

And beyond the eventual acquirer, founders often need to continually sell the vision to new investors, top-tier hires, and even their own teams. Investors who can help articulate that vision clearly are often better positioned to influence outcomes.

As a private market investor, exits are where all value is ultimately realised. Understanding how they work is essential to:

• Evaluating investments: including your potential downside, not just upside

• Understanding deal terms: like liquidation preferences, drag-along rights, and more

• Assessing risk realistically: including how and when liquidity might be achieved

Early-stage investing is high risk by nature, and even successful companies may not deliver strong returns to every investor. The exit terms, timing, and capital structure all shape how much you actually receive.

Investing in startups requires a long-term mindset and a deep understanding of the mechanics that drive returns. Exits are complex, infrequent, and nuanced. But they’re also where the potentially life changing upside exists.

Thanks to platforms like Shuttle, the requirement for that deep understanding of the mechanics is made simpler through our educational resources and how we source, screen and diligence opportunities for our members.

What we’ve been working on at Shuttle

• We wrapped up our investment in Workflow 🥳

• Integrating “Pay by Bank” for faster, on platform deposits 🏦

• Added Google login for easier sign ups 🗝️

• Working on a couple of very exciting investments 👀

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of Shuttle. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. Shuttle’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
Shuttle Co-Founders