Exit

In practice

An investment aims either at the long-term development of the company or at a lucrative exit. Venture capital funds usually run for ten years and are expected to realise their investments within that time. They are therefore under pressure to exit. The most common route is a sale to a larger company, the strategic buyer. An IPO remains the exception. To enable the majority to sell the whole company, it is usually given a drag-along right, under which it can require the other shareholders to sell as well. Founders should negotiate minimum proceeds in return. Conversely, the tag-along right secures the minority’s right to sell on the same terms. Depending on what has been agreed, the proceeds are not simply distributed according to shareholdings, but first according to liquidation preferences. At a mid-range price, this can often leave little for the founders. Whether the shares are held privately or through a holding company determines the tax position under German law and can no longer be changed with tax effect shortly before the sale.