Liquidity Event

Liquidity Event: What it Is and How It Works

A liquidity event is an action—such as an acquisition, merger, or initial public offering (IPO)—that lets company founders, early investors, and employees convert previously illiquid equity into cash. It serves as an exit strategy for investors who backed a company during its seed or early rounds and expect a return within a reasonable timeframe.

Key takeaways

• Liquidity events convert private, hard-to-trade equity into cash or publicly tradable shares.
• Common forms are IPOs and direct acquisitions; private equity buyouts and mergers also produce liquidity.
• Investors typically push for liquidity events; founders may resist if it dilutes ownership or reduces control.
• Employees who hold stock or options often benefit alongside founders and investors.

Common types of liquidity events

• Initial public offering (IPO): The company lists on a public exchange, allowing shareholders to sell shares on the open market.
• Acquisition or merger: Another company or a private-equity buyer purchases the firm; shareholders receive cash, stock in the buyer, or a mix.
• Secondary sale: Early investors or employees sell shares to later-stage investors or on secondary markets (less common as a company-wide liquidity event).

In many acquisitions, founders and key employees are retained and may receive additional compensation (cash or shares) over time as part of earn-outs or retention agreements.

The founders’ role and conflicts

Founders and investors can have different priorities. Investors typically expect a liquidity event to realize returns, while founders may prioritize long-term control, mission, or growth over immediate cashing out. For example, Facebook’s 2012 IPO raised about $16 billion and valued the company at roughly $107 billion, producing substantial wealth for early shareholders while changing the company’s public ownership structure.

IPO timing and regulation

Companies generally control the timing of an IPO, but regulatory thresholds trigger public reporting requirements. If a firm has more than $10 million in assets and either over 2,000 total shareholders or more than 500 non-accredited shareholders, the SEC requires periodic public financial reporting. These rules effectively push some companies toward registration and public disclosure even if an IPO is not planned.

How many companies go public?

IPO activity varies by year. In 2023, U.S. markets saw 153 IPO deals that raised about $22.7 billion, with 132 of those listings on U.S. exchanges.

What is a venture capitalist?

A venture capitalist (VC) is a private-equity investor that provides capital to high-growth companies in exchange for an equity stake, typically expecting an exit via a liquidity event within a defined investment horizon.

Bottom line

A liquidity event is the mechanism that enables founders, early investors, and employees to monetize equity in a private company. Whether pursued through an IPO, acquisition, or other means, liquidity events are central to how startups and growth companies deliver returns to their backers and stakeholders.