Guide

Venture capital

How venture capital investors work with and exit from companies

If you accept funds from an external investor, you must share information about your company with them and delegate some decision-making. You can draw up a shareholders' agreement to establish how joint decisions will be made, and to balance the interests of different shareholders.

The shareholders' agreement will also cover the rights and duties of your investment fund managers, eg:

  • receiving regular company performance reports
  • consultation on important decisions, eg business acquisitions and disposals
  • control of the exit process

Day-to-day operations

You should keep in contact with your fund managers, as they can help you with strategic decisions and issues such as:

  • organising further investment
  • negotiating with banks
  • negotiating the sale of the company to partners in the sector

Investing fund managers generally leave day-to-day operations and growth strategies to the company's senior management. They may, however, take a more hands-on role if there is a crisis, if the company is a start-up, or if the investment is a complex one, eg a debt-financed operation.

Company committees and boards

Most fund managers will expect to be present or be represented on a company's board, subject to normal corporate governance standards.

Financial board members are subject to their own professional codes of conduct, including those which cover conflicts of interest between different investments. Fund managers can also play an active role in important committees, eg for audit or remuneration.

Liability

A fund manager sitting on a company board has a duty of care to its shareholders and creditors. They will generally avoid involvement in day-to-day operations, as this will increase their liability should the company collapse.

Experienced fund managers should be able to identify signs of crisis in a company, such as a sharp rise in fixed costs or high staff turnover.

Exit strategies

Venture capital (VC) investors may decide to sell their investment and exit a company. Alternatively, the company's management can buy the investor out (known as a 'repurchase').

Other exit strategies for investors include:

  • sale of equity to another investor - secondary purchase
  • stock market floatation
  • liquidation - involuntary exit

Private equity firms may decide to not sell all the shares they hold. In the case of a flotation, they are likely to hold the newly-quoted shares for at least a year.

The exit value of a company must be mutually agreed between all parties, and will depend on:

  • the type of operation
  • the number of shares sold
  • the original valuation of the company

Private equity funds have either a limited lifespan - usually ten years - or they can continue to operate as long as they have capital to invest.

For further information see secure equity investment.