Stock Buybacks for Venture Companies
All successful venture-backed companies have an exit. Stock buybacks are one option for the end — the time when you no longer own your start-up anymore. Ideally, you should plan your exit well in advance.
A founder’s exit is a mixed blessing because you often walk away with a decent payout, and you are no longer responsible for your employees’ paychecks and the success of the company. However, it can be a hard time for a founder who doesn’t know what to do next.
In a stock buyback, the company buys stock back from the angel or VC investors. In this exit, the VCs get their money back directly from the company instead of from new investors in an IPO or from another company in an M&A.
When a stock buyback is your exit strategy, VCs usually look for the purchasing company themselves. Entrepreneurs who think they can buy the stock back in the future are typically inexperienced and unrealistic in their expectations. Although stock buybacks can and do happen in the real world, it’s not usually a strategy that VCs find attractive.
Publicly traded companies may have many reasons to pursue a share repurchase: defending against a hostile takeover, reducing dividend payout expenses, increasing earnings per share, and investing excess cash. In most of these cases, unless a leveraged buyout is involved, stock buybacks are partial repurchases of shares.
Even big public companies cannot afford to buy back all of the outstanding shares. Your smaller nonpublic company is not likely to have the resources to make a complete buyout, and VCs are not going to be interested in a piecemeal buyout.
VCs need to have homeruns with one or two out of the ten investments they make. If you have a stock buyback agreement with your investors, you are not likely to offer 50X (50 times) return, but this is what every VC is looking for on every deal. If the potential return absolutely cannot go higher than 2X or even 10X, the deal will just not be interesting to them.