What the greatest technology investors say about Exiting

A Fair Vesting Formula Optimizes Interest Alignment

Basil Peters angel investor and Principal Strategic Exits Corporation

“Investors get 100% of their money back on the sale [of the company], so 50% vesting on the sale is fair and optimizes alignment [between entrepreneurs and investors].

[The] most fair vesting formula-  Assuming that was the fundamental agreement, and that 50% of the value is often created at the exit, then reverse vest: 50% of the shares [vesting] daily over  a three year period, and the other 50% when there is a ‘sale’ of the company.  

All vesting for senior employees accelerates on a sale of the company.”  Basil Peters, Maximizing Exit Value Angel Capital Association,  Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf,  pg 30-31

How to Ensure There's Alignment on Exit Strategy

Basil Peters angel investor and Principal Strategic Exits Corporation

 “It’s surprising how often there is a misalignment between key stakeholders on the exit strategy. The only way to check is to get a ‘signoff’ on a written exit strategy. [] [Check] alignment annually. [] [The] right way to build a company is [to] determine the type of business, build alignment on the exit strategy, THEN develop the financing plan and then start to contact investors.”   Basil Peters, Maximizing Exit Value Angel Capital Assn Annual Summit Workshop Apr. 15, 2009, pg 28 & 32; 


Why VC's Block an Exit

Basil Peters angel investor and Principal Strategic Exits Corporation

“Most entrepreneurs don’t even know that a VC is likely to block an exit when they accept the VC’s money. [] VCs design their investment agreements to give them the power to block exits.”

“[] VCs will almost always block a sale where they only make a 3-4X return on their investment.  This could have easily been a 10X return for the angels and a 100X return for the entrepreneurs.

[] The winners [must] produce at least 10-30X return for the [VC] fund to perform respectably.

[] This propensity to block exits is one of the reasons that every company needs a clear exit strategy before [it approaches its] first investor.”  Basil Peters, How VCs Block Exits, August 28, 2010, http://www.exits.com/blog/how-vcs-block-exits/; Why VCs Will Block Good Exits;  http://www.angelblog.net/Why_VCs_Block_Good_Exits.html

High Valuations Can Limit Exit Opportunities

Josh Kopelman Partner First Round Capital and former entrepreneur

Kopelman advises that entrepreneurs who “[] try to maximize valuation [] in many cases [] might be shortsighted” because high valuations can limit exit opportunities.  “[] too many founders are not aware that they are shutting off the majority of exits -- and therefore increasing risks -- when they accept a high valuation.”  “[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”  Thus, a VC could block an exit that could have been a fabulous payout for entrepreneurs and angels.  Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html;  When the music stops... March 10, 2006;  http://redeye.firstround.com/2006/03/as_a_little_kid.html