Question & Answer
What Happens When an Investor Wants to Sell Their Shares?
Every investor enters a deal with an exit in mind. Whether they’re looking for liquidity, shifting strategy, or reacting to market conditions, at some point, they’ll want to sell their shares. The question is: what happens next?
How an investor exits can significantly impact a company’s ownership structure, governance, and even valuation. A well-structured shareholder agreement will outline the process, ensuring that founders and remaining investors aren’t blindsided by an unexpected sale.
Understanding Investor Exit Paths
When an investor wants to sell, they typically have several options:
- Secondary Sales – Selling shares to another investor, institution, or private buyer.
- Liquidity Events – An acquisition, merger, or IPO providing a structured exit.
- Buybacks – The company itself repurchasing shares from investors.
- Market Sales – If the company is public, shares can be sold on the open market.
The method of exit depends on the stage of the company, market conditions, and the terms of the shareholder agreement.
Key Clauses That Affect Share Sales
Shareholder agreements often include specific provisions governing how and when an investor can sell their stake. Founders must be aware of these terms to avoid unwanted changes in ownership.
Common clauses include:
- Right of First Refusal (ROFR) – Existing shareholders or the company get the first opportunity to buy the shares before they’re sold to an external party.
- Tag-Along Rights – If a major investor is selling, minority shareholders may have the right to sell their shares under the same terms.
- Drag-Along Rights – If a majority investor sells, minority shareholders may be forced to sell as well to ensure a clean transaction.
- Lock-Up Periods – Restrictions that prevent investors from selling shares within a certain timeframe, common in pre-IPO agreements.
These clauses exist to protect both founders and investors from disruptive or predatory share transfers.
What Founders Should Watch Out For
Investor exits can introduce risks, particularly if shares end up in the hands of a competitor or a party that doesn’t align with the company’s vision. Founders should be proactive in managing these situations.
Key concerns include:
- Loss of Strategic Alignment – A new investor may have different priorities that conflict with company goals.
- Governance Shifts – Board representation or voting power could change significantly.
- Market Perception – If a well-known investor sells at the wrong time, it can signal weakness to other investors.
Structuring agreements with clear exit protocols ensures that investor transitions happen smoothly without destabilizing the business.
How to Handle Investor Exits Proactively
Founders should plan for investor exits long before they happen. A strong governance framework, clear communication, and well-structured shareholder agreements help avoid last-minute complications.
Best practices include:
- Keeping open dialogue with investors about their long-term exit plans.
- Ensuring ROFR and tag-along provisions protect existing shareholders.
- Having a buyback plan in place for strategic share repurchases.
Managing investor exits strategically ensures that founders maintain control over their cap table and company direction.
When an investor wants to sell their shares, it’s not just their exit – it’s a shift in the company’s ownership dynamics. How that transition is handled can affect governance, valuation, and strategic direction.
Founders need to anticipate and control the terms of investor exits before they happen. A well-structured deal isn’t just about raising capital – it’s about ensuring stability when investors decide to leave.
Deal Structuring
Buy the book today and dive into practical techniques that empower you to get started immediately, navigating transactions efficiently and maximizing your success in minimizing cash requirements.
In this book, you will:
- Be introduced to the fundamentals of deal structuring
- Learn 19 proven deal models for structuring deals
- Discover 39 key elements of deal nuances
- Access 32 actionable clauses for your term sheets
- Explore 9 specific deal structures
- Receive 257 pages of invaluable insights
- Gain the distilled expertise of 20 years