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Financing and exit options that may be available to a successful private technology company are the following: sale of the company, venture capital financing or going public. Underlying the decision-making process is a fundamental question: Do the decision-makers want to cash out now or raise additional capital in the hope of greater returns down the road?  

At current valuations, a sale of the company may be attractive, recognizing that a sale also deprives the sellers of sharing in some or all of the upside associated with future growth. While an all-cash deal freezes the value on the sale date, disagreements as to the value of the company often result in a component of the purchase price being contingent and/or deferred. Examples include earn-outs, subordinated notes or preferred stock in the company, and stock of the buyer. In most cases, the sellers' ability to realize the promised additional value will be largely out of their hands. Sellers should treat acceptance of contingent and/or deferred consideration as a decision to invest in the company or buyer. Sellers who blithely count on receiving the full purchase price may wish that they had chosen another alternative, if some or the entire expected deferred component proves to be illusory.

Historically, an IPO has been attractive for founders desiring to achieve some liquidity while benefiting from the continued growth of the company. The proceeds from the offering provide the company with growth capital and the public market for the stock (often at higher multiples than private markets) provides liquidity for shareholders. Although a company with a valuation of less than $250 million might not find a US IPO listed on NASDAQ to be attractive, several articles in the series focused on the possibility of going public on London's Alternative Investment Market (AIM) or another foreign exchange. The advantages of AIM over NASDAQ for a smaller-cap company include less regulation in general (and no Sarbanes Oxley in particular) and greater access to capital. An AIM listing does not foreclose the possibility of a US IPO on NASDAQ down the road.

Founders focused more on the growth of the company than an immediate cash-out may find venture capital to be the preferred alternative, not only because of the investment dollars but also because of the role the VCs can play in the growth of the company. Common objections to venture capital are lower valuations, restrictive terms and interference with management. Although public market multiples may be more favorable, recently the pricing of later stage venture capital has become more competitive, and the terms more favorable to entrepreneurs. While some investors do interfere with management, many companies benefit from their VCs' business acumen, experience and contacts. A growth company's long-term "viability" may be a concern for certain customers and strategic partners, particularly when compared to its major competitors. A sizable investment by a reputable venture firm may allay these types of concerns.

The choice of a venture partner requires consideration of the relative importance of the valuation and intangible contributions. Recently, new sources of venture money, including hedge funds and even private equity (buyout) groups, may provide better valuations and/or more flexible terms than VCs, but are not as likely to provide the intangible benefits discussed above and may be less willing to provide follow-on investments.

The good news for founders is that competition has brought a wide range of approaches to the marketplace. Traditional and non-traditional investors provide products that may make a decision to forego personal liquidity in a sale or IPO less painful. Some permit the founders of a relatively mature company to "cash out" in part by selling some of their shares to the investor. Some make long-term unsecured loans (albeit with warrants) to profitable businesses, which results in less percentage dilution in the founders' equity.

Clearly, no exit or financing option is without risk; even an all-cash sale entails the opportunity cost of not choosing to grow the company. Ultimately, the decision-makers of a company at the cross roads should determine the expected value of each alternative in light of their appetite for risk, and choose the option they perceive as optimal. //