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Business Plan Exit Strategy

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Okay, we know your investors aren't going to move in with you and your family. You just need their money, and you need a way for them to exit your company when they want to (preferably leaving it intact, if possible).

First, when you approach any investor, ask them what their time lines typically are for judging the performance of their investments. These may be totally independent of what you're doing, and in most cases, quite frankly, what you do may have nothing to do with it, other than you're using their money. So this creates a situation where both parties must be protected.

Stock Exit Strategies

For start-ups, the most common offering is for stock in exchange for "X" amount of money. Preferred stock or common stock can be used as an exit strategy. Here's a quick overview. Common stock is generally unrestricted and can be traded freely, which is why the IPO is so popular. It doesn’t have to be on an exchange or even listed in the "pink" sheets to be bought and sold by individuals. Preferred stock, on the other hand, is generally restricted, meaning that it can only be sold (traded) in small increments over time, or not at all, for a period of one or two years. (Federal and state laws and regulations regarding securities vary). So preferred stock can hold an investor in, unless the corporation provides for an exit in the by-laws.

These exit strategies are buy-backs of the preferred stock at a set return to the investor. Setting the return is an analytical process closely allied to evaluating your company. You must also do this to devise a good strategy.

Let’s look at an oversimplified example. You offer and issue preferred stock at a value of $1.00 per share. You have authorized 10,000 shares of preferred stock only – no common stock authorized (yet). The investor invests $5,000 for 50% of the company (5,000 shares), with the provision that in the by-laws of the company, there's allowance for buy-back at XXX% of the original purchase price of the stock. If you have assumed that you have set a value of your company at $10,000, you win the prize. Most buyback offers I’ve seen that work are 200% of original stock price or a negotiated price.

For protection of the company, (and investors understand), there also needs to be enactment procedures detailed in the by-laws as to when the buyback can occur, and under what circumstances. This is yet another chapter in the stock exit strategy....continued

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