Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups.

Look, everyone in startups talks about exits like they're these magical moments where champagne flows and everyone retires to the Bahamas. The reality? Most liquidity events are way messier, way less glamorous, and honestly, way more interesting than the headlines suggest.

A liquidity event is just fancy talk for when investors and founders can finally turn their ownership into actual money. Could be an acquisition. Could be an IPO. Sometimes it's a secondary sale where early investors sell to new ones. The point is: illiquid shares become liquid cash.

The Types Nobody Tells You About

Sure, you know about IPOs. Who doesn't love a good public offering story? But here's what actually happens most of the time in startup land.

The small exit. This is your company getting acquired for, say, $50M when you'd raised $30M. Sounds decent until you realize the math. After preferences, liquidation waterfalls, and all that legal stuff, founders might walk away with way less than expected. Sometimes nothing at all if the terms were bad.

We've seen this play out dozens of times. Founder thinks they're getting a win, then discovers their Series B investors had 2x liquidation preferences. Ouch.

The zombie exit. Company isn't dead but isn't growing. Founder manages to sell for enough to give investors some money back, maybe 1-2x. Nobody's thrilled, but at least it's not a total loss. This happens more than you think.

The actual home run. These are rare. Like, really rare. But when a portfolio company exits for hundreds of millions or goes public, that's when the VC model actually works. One of these can return an entire fund.

The Math That Matters

Here's something critical that most founders miss: the exit price isn't what matters. It's the multiple on invested capital.

Say you invest $100k into a company at a $5M post-money valuation. If that company sells for $50M, you might think you made $1M. But after three more rounds of dilution? Maybe you're sitting at $500k. Still good, but the math isn't simple.

This is why early-stage investors need to shoot for 100x outcomes. Because by the time a company goes through multiple funding rounds, your ownership gets sliced up. A $500M exit sounds massive, but if you only own 0.2% after dilution, you're looking at $1M back on a $100k investment. That's 10x, which is good, but not fund-returning.

What Founders Get Wrong

Thinking the valuation is the exit price. Your company's valued at $100M on paper during your Series B? Cool. That doesn't mean it'll sell for $100M. Markets change. Growth slows. Things happen.

Ignoring liquidation preferences. If you raised on terms that give investors 2x preferences and you sell for 2x the last valuation, they're getting paid first. You might get nothing. Read your term sheets.

Not planning for taxes. This is brutal. You finally get a liquidity event and realize 40% goes to taxes. Plan ahead.

The Waiting Game Nobody Warns You About

IPO markets have been basically frozen lately. Exit activity is way down compared to 2021. This means capital is locked up longer. LPs who invested in funds expecting 7-10 year returns are now looking at 12-15 years.

This affects everyone. Founders who thought they'd exit in 5 years are now grinding at year 8. Early employees' stock options are underwater. Angels are stuck with illiquid shares in pretty good companies that just... can't find the right exit.

We're seeing this across the portfolio. Companies that would've gotten acquired three years ago for decent prices are now just holding steady, trying to get to profitability without raising more.

What You Can Control

Focus on building a business that actually makes money. Sounds obvious, but profitable companies have options. They can wait for the right buyer. They can go public when markets open up. They can even just keep running profitably.

Companies that need to raise every 18 months? They're at the mercy of whatever exit opportunity appears. And trust me, when you're desperate, the offers aren't great.

Keep your cap table clean. Every weird side letter, every complicated preference stack, every handshake deal that wasn't documented properly comes back to haunt you during a liquidity event. Do it right from the start.

Build relationships with potential acquirers early. Most acquisitions happen because someone knew someone. The founder had been talking to the acquiring company for years. They'd established trust. When the time came, the deal happened naturally.

The Real Talk About Returns

Most exits are small. Like, under $100M small. For founders, this might still be life-changing money. For investors, especially those who came in at later stages, it might barely move the needle.

This is why the venture model needs those rare massive wins. The Ubers, the Airbnbs. These companies don't just return a fund – they can return multiple funds and make up for all the losses and mediocre exits.

If you're building a company and raising VC money, you need to be shooting for one of these outcomes. Not because you're greedy, but because that's literally the only way the math works for everyone involved.

The Path Forward

Liquidity events are the goal, but they're not the whole story. The best founders focus on building sustainable businesses that have multiple exit paths. They keep their options open. They don't burn bridges. They maintain clean cap tables and good relationships with investors.

And when the liquidity event finally happens, whether it's a modest acquisition or a massive IPO, they handle it with grace. They take care of their team. They're honest about the outcome. They learn from the experience.

Want to build a portfolio of startup investments where you can see firsthand how liquidity events play out? Angel Squad gives you access to deal flow, education on how these outcomes actually work, and a community of investors who've been through multiple exit cycles. Because the best way to understand liquidity events is to actually participate in a few.

The truth is, most liquidity events aren't headline news. They're quiet, complicated, and sometimes disappointing. But they're also the mechanism that makes this whole startup ecosystem function. Understanding them isn't optional if you're serious about building or investing in startups.

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