Liquidity Event

The point at which a private company's equity can actually be converted into cash - most often an acquisition or an initial public offering, occasionally a documented secondary sale.

Example

A SAFE holder's paper stake shows a mark on the cap table for years before a liquidity event finally turns it into money.

Important

Between liquidity events, a private position has no realisable value regardless of what the cap table shows - the mark is an accounting figure, not cash.

Related terms

• Illiquidity discount — The reduction in price a seller must accept to find a buyer for something that cannot be readily traded.
• Post-Money Valuation — A company's agreed value immediately after a financing round's new money has been added, equal to the total resulting share count multiplied by the round's price per share.
• Secondary market — Where an existing investor sells a position to another investor rather than back to the issuer or the fund.

Lessons that explain it

• Acquisition, listing, secondary sale or wind-down - most exits are the first and the last — Private investments return money through a sale of the company, a public listing, selling shares to another investor, or a wind-down. Public listings are the most visible and among the least common outcomes. (9 min)
• A listing gives you shares you cannot sell yet, at a price that can fall before you can — After an IPO, early investors typically hold shares subject to a lock-up period. The price at listing can change substantially before they are free to sell. (10 min)
• A paper gain is a price someone paid once, not money you have — Private positions are usually marked at the last round price, adjusted for dilution. That mark is an estimate that can lag reality, and only a sale or distribution turns it into cash. (10 min)
• One investment in twenty pays for the other nineteen, or nothing does — There is no coupon and no dividend here. The return is realised only at an acquisition or a listing, most positions return little or nothing, and the entire portfolio's economics usually rest on one or two outcomes out of many. (12 min)
• One cheque is not this asset class; twenty of them might be — The economics in this subject describe a portfolio of many small bets, not a single concentrated one - and somebody who can only make two or three checks is not really practising this asset class in any statistical sense, whatever it feels like while they are doing it. (9 min)
• Knowing what each investor needs back tells you how they will behave — Every investor type has a different definition of a good outcome. Mapping those needs explains most disagreements on a cap table before they happen. (10 min)

All 578 terms in the Investing glossary