Choosing a path to fund growth, liquidity, or both can be daunting whether you've done it before or not. Tech markets move incredibly fast today, and that dynamic pace demands important decisions regarding your company's future. Should you find an investor to help you grow the business? Or should you find an acquirer and cash in on the hard work you invested in building your business? Could you do both? In either case, the choice you make, like choosing a lifelong partner, can significantly impact your ability to achieve your goals and ambitions. It's also important to understand the cap table math because you'll be diluted as a result of the choice you make, and that will have an impact on your long-term liquidity.

In deciding a path to fund growth, liquidity, or both, it's important to understand that transaction structures can take on different forms depending on your goals and those of your shareholders. Here are some of the common transaction structures.

Recapitalization

There is a wealth of private equity funds in today's market available for investing in software and technology companies, making recapitalization an attractive path for growth, liquidity, or both. Recapitalization, the process of restructuring a company's cap table, often with private equity firms acquiring shares from existing shareholders, is used regularly by business owners to get their companies to the next level. In addition to possible liquidity for shareholders, the approach solves issues regarding risk, control, and team expansion, and it's a way to gain valuable go-to-market help and outside expertise.  

Different types of buyers and investors 

The Corum Group video Who is buying my company describes the different types of buyers that invest in and acquire technology companies using different legal and cap table structures. There are private equity firms that will only make minority growth investments, where they purchase less than a 50% equity share in a company, and many that will only do 51% and higher majority (control) investments. There are also firms that will do either minority growth or control transactions. Still, others use debt and equity to fund their transactions. On the other hand, a strategic acquirer, a company that plans to integrate the seller's business into their own organizational structure, controls, and management, will typically buy 100% of the business.

Minority Growth Round

When less than 50% of the equity in a company is sold, it is considered a minority growth round. This type of investment is typically used when the existing team in a company works with private equity to raise money to fund growth and wants to stay with the company to continue running the business. The investment in the business places capital on the balance sheet to fund marketing and technology or bolster the go-to-market strategy. It can also be used to fund acquisitions. In the transaction, new shares are issued or existing shares are acquired from existing shareholders. Purchasing shares from existing shareholders is one way for founders to reduce risk and take "chips off the table," converting their equity into liquidity. Minority growth investors typically look to place their capital into a company based on metrics around growth and retention, as well as the caliber of the existing team.

Majority Growth Round

When more than 50% of the equity is sold to an acquirer, it is considered a majority growth round. This is a common approach used by private equity in today's market. Like a minority growth round, an investment can be made in the business to put money on the balance sheet to fund marketing and technology or bolster the go-to-market strategy. It can also be used to fund inorganic growth, that is, acquisitions. In a majority growth round, either new shares are issued, existing shares are acquired from existing shareholders, or the equity from the existing shareholders is moved into another entity with other shareholders. Shareholders may also sell their shares, and depending on the amount of their equity that remains in the company or the amount that they roll into a new entity, they have the ability to earn a return when there is a future transaction. A key metric in rolled equity is the return on the invested capital. Private equity firms typically use a metric called Multiple on Invested Capital (MOIC) in transactions involving rolled equity. The metric describes the value or performance of an investment relative to the initial capital invested in the company. It is one of the important metrics to understand.

Full Sale

In a full sale, 100% of the company's equity is sold, and all the shares are acquired by either a private equity firm or a strategic acquirer based on an agreed-upon valuation.

Asset Sale

Asset sales are also used in tech M&A, and there may be benefits to sellers and buyers in taking this approach depending on the goals of the parties. In an asset sale, specific company assets and liabilities are acquired and moved into a new or different entity. The company selling the assets typically remains in place and continues to own the assets and liabilities that aren't acquired.

Venture Round

Venture round investments, typically made by venture capital firms or corporate venture arms, may be made using a different class of shares such as preferred shares. The holders of the preferred shares may have different pre-emptive rights than those of common shareholders, and often the venture investors have liquidation preferences. This is typically different than a minority growth round, where often a private equity firm makes an investment with the same class of shares as those owned by existing shareholders. Also, minority growth investors usually provide secondary capital, giving existing investors the ability to sell their shares for liquidity. Venture rounds typically only invest primary capital that is placed on the balance sheet to fund growth.

Corum can help

Thinking through your goals is critical to make sure you're looking for the right type of investment and investors. And calibrating the market will help you determine the best options to fund the growth of your company and liquidity for your shareholders.

Corum can help you do that. With ownership of a vast global knowledgebase of companies, and a highly-successful process for achieving an optimal outcome for its clients, Corum will help you calibrate the market. It will also do a global search to find multiple investors with high interest and help you determine which investor is the right one for you and your company.

If you are looking for liquidity, the Corum process will help you find it in a way that is best suited to meet your and your shareholders' needs ‒ whether it comes from a recapitalization, a growth round, a sale, or another type of transaction. In addition, you'll benefit from the auction environment that Corum creates for its clients. And you will get the help you need to manage the rigorous due diligence that often accompanies a deal. In any case, reach out to Corum if you'd like further information on your options and how they relate to your business.