The first point to note with regard to exit is that this is an expectation under the traditional model (typically after 5 – 7 years of operation/value creation). Given the majority stake on the self-funded side there is less of an expectation, with some searchers choosing to stay on for an extended period as CEO.
If the exit option is utilised then the outcome for the searcher depends on a) the percentage equity holding; and b) the value of the company at the point of exit.
Under the traditional model the searcher will typically have 17% equity at exit (rising to 25% if certain IRR targets have been met). On the other hand a self-funded searcher will have over 50% of the equity (normally around 70%). So on the equity front a self-funded searcher is in a stronger position.
However the other key factor is valuation at exit. As already mentioned, traditional deals are typically larger (and can be a lot larger). Additionally, it is arguable that the accountability and guidance from the investors make it less likely that the business will fail.
It therefore becomes a question of what is worth more, a smaller slice of a larger (and potentially more stable) pie or a larger slice of a smaller pie. Regardless of model used there are multiple different routes available to exit. A later article in the series will see Sriram Ainkaran provide potential avenues an exiting searcher could choose to take.