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Liquidity Event: What It Is and How It Works

By
Adam Hayes
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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
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Updated January 09, 2024
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Charlene Rhinehart
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Reviewed by Charlene Rhinehart
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Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.
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Michael Logan
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Fact checked by Michael Logan
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Michael Logan is an experienced writer, producer, and editorial leader. As a journalist, he has extensively covered business and tech news in the U.S. and Asia. He has produced multimedia content that has garnered billions of views worldwide.
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What Is a Liquidity Event?

A liquidity event is an acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to cash out some or all of their ownership shares.

A liquidity event is considered an exit strategy for an illiquid investment or equity with little or no market to trade on. Founders of a firm push toward a liquidity event, and investors like venture capital (VC) firms, angel investors, or private equity firms expect one within a reasonable amount of time after initially investing capital.

Key Takeaways

  • A liquidity event allows company founders and early investors to convert illiquid equity into cash through events such as an IPO or direct acquisition by another company.
  • Investors who back a start-up expect to take their money out within a reasonable time.
  • While most investors favor liquidity events, founders may not be so eager if the event means diluting their holdings or losing control of their company.

Types of Liquidity Events

A liquidity event is most commonly associated with founders and venture capital firms cashing in on their seed or early-round investments. The first handful of employees of the companies also stand to reap the windfall of their company going public or being bought out by another company.

In the case of an acquisition, the founders and employees of the firm are usually retained. There may be an initial liquidity event followed by additional compensation in shares or cash as they serve out their contracted terms with the new owners.

The most common liquidity events are IP0s and direct acquisitions by other companies or private equity firms.

The Founders Role

In some cases, a liquidity event is not necessarily the goal of the founders of a firm, though it certainly is for investors. Founders may not be motivated by the riches that a liquidity event bestows. Some founders may resist calls from early investors to take a company public out of fear of losing control.

Mark Zuckerberg, his cofounders, and the venture capital firms and individuals listed as shareholders in Facebook's (now Meta) pre-IPO Form S-1 filing in 2012 had a lot of positivity for its liquidity event. The company raised $16 billion in the IPO and began its first day as a publicly traded company with a valuation of $107 billion. Zuckerberg, who owned 28.2% of Facebook (now Meta) before the IPO, ended with a net worth of approximately $19.1 billion.

Does the Company Control the Timeline for an IPO?

The timeline for an IPO is commonly under the control of the company. However, for a company with more than $10 million in assets and more than 2,000 investors (or 500 shareholders who are not accredited investors), the Securities and Exchange Commission (SEC) requires it to file financial reports for public consumption. This is known as the 2,000 investor limit.

How Many Companies Go Public Each Year in the United States?

In 2023, 153 IPO deals raised $22.7 billion in the United States, with 132 on U.S. exchanges.

What Is a Venture Capitalist?

A venture capitalist (VC) is a private equity investor who provides capital to companies with high growth potential in exchange for an equity stake. The investment could include funding for startup ventures or expansion efforts.

The Bottom Line

A liquidity event is an event that allows a company's early investors to cash out some or all of their equity. This can be accomplished through an acquisition, merger, or initial public offering (IPO). Companies usually file SEC Form S-1 in anticipation of their initial public offering (IPO). 

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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