Startup Exits: What’s Left for Investors in the End

With a startup investment, the money usually doesn’t come back until the exit, if it comes back at all. In a masterclass in July 2024, Daniel La Marca, then in-house counsel at Companisto, explained what separates good exits from bad ones and why a sale is hard to force even when the contract provides for one.

A startup announces that it has been acquired, and the founders talk about a successful exit. Whether the investors made any money on the deal is something such announcements rarely reveal. In such cases, Daniel La Marca advised checking the commercial register. For a limited liability company (GmbH), the shareholder list filed there shows, albeit with some delay, whether shares have changed hands. If they haven’t, the buyer probably acquired only certain assets of the startup. In that case, it is fair to doubt that the deal was a good one for the shareholders.

In the masterclass “Der Exit” (“The Exit”) on July 9, 2024, La Marca, who headed Companisto’s legal team at the time, addressed several questions, including the one many investors care about most: what’s in it for them in the end. An exit is the point at which investors get out of their investment, for example through a sale of the company or an IPO. Until then, young startups rarely generate any ongoing returns.

Good exits and bad exits

La Marca divided exits into good, neutral, and bad ones, based on their financial outcome. An exit is good when an IPO or a sale brings in enough for investors to get their money back, “plus at least a little something on top.” In a neutral exit, they get back no more than what they put in. In practice, however, that rarely happens, he said. Most of the time, there is either a good exit or nothing at all.

He called a bad exit an “exit by demise.” Either the startup is on the verge of insolvency, or proceedings have already been opened and an insolvency administrator is selling off whatever is left. Even more drastic is a fire sale, in which the company lets its assets go for a token price. According to La Marca, this usually happens so that the founders and managing directors can save face. It adds no value, he said. His advice to check exit announcements against the commercial register is aimed at cases like these.

Even if there is still something to distribute in an insolvency, the shareholders are in a weak position. In insolvency proceedings, creditors come first. Shareholder loans, meaning loans that shareholders have made to the startup, are generally subordinated and are repaid only once the other insolvency creditors have been paid in full. Those who contributed equity rank even further back and receive only what is left after all creditors have been satisfied. As an investor, La Marca said, you should assume you will see nothing.

How an exit works legally

Legally, an exit can essentially be carried out as an asset deal, a share deal, or an IPO. La Marca deliberately left aside partial exits through secondaries, in which investors sell their shares to new financial investors ahead of a full exit, so that he could focus on the complete exit.

Cherry-picking in an asset deal

In an asset deal, the buyer acquires specific assets of the startup, while the company itself stays with its shareholders. The contract has to identify each item precisely, so by implication anything not listed stays with the company. This lets the buyer pick out the best parts, often intellectual property such as patents, software, or trademarks. To make sure the selling company cannot compete with it later, the buyer usually insists that it change its name and be dissolved in the near future.

Employment law calls for caution. If the buyer takes over enough assets that they amount to a business or part of a business, the employment relationships also pass to the buyer under Section 613a of the German Civil Code (BGB), unless the employees object. La Marca said contract clauses meant to rule this out had a “homeopathic” effect at best. The statute takes precedence.

From a tax standpoint, an asset deal pays off mainly for the buyer. The buyer records the acquired assets at the purchase price, which is usually well above their previous book values (a step-up). To the extent the assets are depreciable, the buyer can write off this higher value against taxable income. For any goodwill acquired in the deal, the law prescribes an amortization period of 15 years. The selling startup, by contrast, has to pay tax on its entire gain from the sale. Above €1 million, it can offset losses from previous years against that gain only to a limited extent.

Investors face another drawback. The purchase price goes to the startup, and the shareholders receive money only when the company distributes it, for example in the liquidation that follows. At that point, all creditors come first, and the remaining assets may not be paid out to the shareholders until at least one year after the public notice to creditors, a waiting period known as the blocking year (Sperrjahr).

A full takeover through a share deal

In a share deal, the buyer acquires the shares and with them the company as a whole. The company continues to exist with all of its rights and obligations. Its debts and liability risks remain with it, so economically they now fall on the buyer. That is why due diligence, the thorough examination of the company, matters even more in a share deal than in an asset deal. In a bad exit scenario, La Marca said, a buyer would never choose a share deal.

For the shareholders, a share deal is the more direct route. They sell their shares themselves, and the purchase price goes to them. For investors who hold their stake through an SPV, the SPV does the selling. They share in the proceeds through their profit participation certificates, as provided for in the certificate terms.

A tax advantage goes mainly to shareholders that are themselves corporations. When a GmbH sells shares in another corporation, 95 percent of the gain is tax-exempt. That is often why, La Marca explained, many startups’ cap tables, which list all of their shareholders, include numerous holding companies and only a few private individuals. The advantage applies only as long as the gain stays in the holding company, however. Once the holding company pays it out to its owners, taxes are due. Private individuals who invest directly or through profit participation certificates cannot take advantage of this tax break. How their proceeds are taxed depends on, among other things, the form of their investment.

The IPO: The ultimate exit

An initial public offering (IPO) gives the company access to additional sources of financing and opens it up to the general public. The investor base becomes “democratized,” La Marca said. Existing investors can sell their shares on the stock exchange and exit that way. At the same time, the share price shows on every trading day what the market is paying for their shares.

All of this sounds nice, he cautioned, but there is a catch. As a rule, existing shareholders contractually commit not to sell their shares for a certain period (a lock-up), even if the price falls. The holding period is meant to stabilize the share price after the listing. La Marca put the duration at between one and two years. In many IPOs, shorter periods apply to financial investors, often six months. In addition, investors with profit participation certificates cannot simply sell on the stock exchange: The shares are held by the SPV, and when and how the investors can exit is governed by the certificate terms.

Then there is the effort involved. A GmbH first has to be converted into a stock corporation (AG) or another legal form that can be listed, with its GmbH shares becoming stock. After that, the company has to meet the listing requirements of capital markets law. The centerpiece is usually a securities prospectus, which the financial regulator BaFin must approve. Even after the IPO, there are ongoing costs and continuing obligations, such as disclosing information that could affect the share price. Whether all this is worth it for everyone involved has to be weighed carefully, he pointed out.

One variant is a merger with a special purpose acquisition company (SPAC). A SPAC is a listed company with no operating business that raises money in its own IPO and then usually has two years to acquire an unlisted company. As a rule, that company’s shareholders receive SPAC shares in return. That way, the company goes public without an IPO of its own. In La Marca’s assessment, this is not an option for early-stage startups. Reputable SPAC deals require a company valuation of at least €50 million, he said, and even that is “extremely low.”

Profit participation certificates instead of shares

For investors who put smaller amounts into a GmbH through Companisto, an exit works differently than for direct shareholders. They do not become shareholders in the startup themselves. Their money is pooled in a special purpose vehicle (SPV), which holds the shares as a shareholder. The SPV issues them profit participation certificates, through which they share in the startup’s business performance. If the startup does well, the certificates can gain value. If it does badly, however, they can lose value, up to and including a total loss of the capital invested. How much they are affected by clauses that force a sale or set the order of payouts depends on the rights attached to the SPV’s shares and on what the certificate terms of the round in question provide.

Business angels who invest larger amounts in the first phase of a funding round, by contrast, become shareholders directly. In funding rounds for stock corporations, investors putting in smaller amounts generally hold shares directly as well. The documents for each round set out what voting rights they have and how those rights are exercised. The sections below mainly describe the rights of direct shareholders.

Exit clauses and drag-along

An exit rarely happens on its own. It can be prepared for in the contracts, carried out by mutual agreement, or, if necessary, forced.

The accelerated exit clause

Even in early funding rounds, many investment agreements include what is known as an accelerated exit clause. Venture capital investors and public funding providers often require one, and according to La Marca, the agreements for rounds financed through Companisto also included one at the time. The clause allows a specified majority of the shareholders, together with a majority of the investors, to hire an exit advisor. The advisor looks for potential buyers, such as large corporations, and “spruces up” the company for a sale.

One participant wanted to know whether startups financed through Companisto reach an exit sooner than those backed by venture capital investors. That is not the case, even with the clause, La Marca replied; an exit is hard to influence and plan in any event. Most investments through Companisto are made at the pre-seed or seed stage, or at Series A at the latest, he said, and several more funding rounds lie ahead before a company is ready to be sold. With the clause, however, the aim is to send a signal. The expectation is that the shareholders, together with investors who come in later, will at least agree on an exit advisor.

A process like this doesn’t come cheap. An exit advisor could well cost €30,000 to €50,000, he estimated. Such advisors often charge a success fee on top of that. In an exit, lawyers bill on the basis of individually agreed fees; what they cost depends on how complex the negotiations are and on the makeup of the shareholder group. Notary fees are set by law and are based on the value of the transaction. All of these costs reduce the proceeds that are ultimately available for distribution.

When not everyone is on board

The simplest exit is one that everyone agrees to. If an offer brings investors, say, one and a half or two times what they put in, hardly anyone will refuse, La Marca said. Unless, that is, a shareholder sees even more potential.

But what if only some of the shareholders want to sell? Without a specific provision, every single shareholder would have to be asked whether they are willing to part with their shares. Anything else would be “a kind of forced expropriation,” La Marca said. That is why most investment agreements contain a drag-along clause. The agreement sets out the conditions. Typically, the clause applies when a buyer wants to acquire a majority of the shares or all of them, the agreed minimum price is reached, and a specified majority of the shareholders consents, often including a majority of the investors. The remaining shareholders must then sell their shares on the same terms if asked to.

The minimum price is generally based on the share price the investors themselves paid, La Marca explained. The idea is that anyone forced to sell should at least get back what they put in. In an asset deal, by contrast, the clause has no effect. In that case, it is the company’s assets that are sold, and the shareholders themselves don’t have to transfer anything. What matters then is that the shareholders and investors approve the sale with the agreed majorities.

However good the clause looks on paper, in his experience it is rarely enforced. In his long career as a lawyer, he said, he had seen perhaps one case in which shareholders were forced to sell under a drag-along. That is because even shareholders who are contractually obliged to sell have to declare the transfer of their shares before a notary, unless the agreement grants a power of attorney for that purpose. If they refuse, the only recourse is a lawsuit, and only a final, binding judgment can take the place of their declaration. Until then, disputes and delays loom, and the buyer may walk away. In practice, the parties therefore usually look for an amicable solution. A scenario from the masterclass “Mein erstes Startup-Investment” (“My First Startup Investment”) shows how a single founder can hold up a sale despite a drag-along clause.

Who gets paid first

How much an individual investor receives depends on the type of exit, on the agreements, and on when and on what terms the investor came in. In a bad exit, the question is moot, because as a rule the investment has to be written off. The question becomes interesting as soon as an exit brings in money.

The last shall be first

The order of payment usually follows the principle of “last in, first out.” The last investors in get their money back first. La Marca explained this in terms of price and risk. If the company has done well, he said, the most recent investors paid the highest price per share. If it hasn’t, they took on more risk by coming in late than the earlier backers did.

Contractually, this is governed by the liquidation preference, which he likened to a waterfall. Each funding round has its own share price and often its own class of shares. The class from the most recent round, which is normally also the one with the highest price, sits at the top and is paid first. The earlier rounds follow, tier by tier. Only once all investors have gotten their money back are the remaining proceeds distributed pro rata among all shareholders at the bottom tier, including the founders with their common shares.

For early-stage investors, this has a downside. When venture capital investors come in later at higher prices, they generally move ahead of the earlier investors in the waterfall. On the other hand, the early-stage investors got in at a lower price and would benefit correspondingly more from a good exit.

Non-participating or participating

Liquidation preferences come in two basic forms. With a non-participating preference, investors get their money back first, but that amount is then credited against what they are due at the bottom tier. If an investor has already received €100,000 up front, all that remains due at that tier is the amount by which the investor’s pro rata share of the proceeds exceeds that sum. In effect, investors get either their original investment or the amount they would receive without a preference, whichever is greater, provided the proceeds are enough to cover the investment at all. Essentially, this is no more than simple downside protection.

Investors who have negotiated a participating preference also get their money back first, but they then share in the remaining proceeds with their full stake as well. “So at the end of the day, I get to dip into the pot twice,” La Marca said. If an investor’s negotiating position is especially strong, the parties can also agree on a preference worth several times the investment, known as a multiple.

Which form prevails depends on the market. In the ten years before the masterclass, La Marca said, the environment had been very founder-friendly, and in most cases the parties agreed on the simple, non-participating preference. Because of the weak overall economy, he said, that had changed over the past year or two, with investors increasingly negotiating participating preferences.

At the time, he stressed that Companisto still negotiated founder-friendly terms on behalf of its investors and did not ask for multiples. Driving a hard bargain in an early round, he argued, invites the investors in every later round to demand the same. After the third or fourth round, there would be nothing left for the founders, and they would no longer be fully committed. “That’s why we don’t include a multiple.” Return forecasts were a separate matter, he said in response to a follow-up question: Whether a multiple of the investment ultimately comes back depends on how the company develops, not on a contractual agreement.

A worked example

A simplified, hypothetical example shows how the waterfall works. The founders of a startup hold 60,000 shares. In a seed round, investors pay €1 million for 20,000 new shares, or €50 per share. Later, new investors come in with €3 million in a Series A round and receive another 20,000 shares at €150 each. On paper, the startup is then worth €15 million. Both rounds carry a liquidation preference equal to the amount invested (1x). The Series A ranks ahead of the seed round. Here is how much each of the three groups receives in total:

If the proceeds aren’t even enough to repay all investors what they put in, the ranking alone decides. At €3.5 million, the Series A investors get their full investment back, the seed investors get half of theirs, and the founders come away empty-handed. At €2 million, the seed investors also get nothing, even though the company was sold, and the Series A investors lose a third of their investment. In both cases, it makes no difference whether the preference is participating or non-participating.

If something is left over after all investments have been repaid, which in this example means at any price above €4 million, the type of preference does matter. With a non-participating preference, everyone simply receives their share of the €30 million. In this example, the seed investors would have multiplied their investment sixfold and the Series A investors would have doubled theirs. With a participating preference, both investor groups dip in twice, and the founders receive €2.4 million less.

The example leaves out transaction costs, employee equity, and taxes. For investors with profit participation certificates, the outcome also depends on which class of shares the SPV holds and what the certificate terms provide. And with any startup, there is no certainty that a sale will happen at all.

No exit timetable

One participant asked for an overview of when exits were planned for each of the startups financed through Companisto. La Marca waved the idea off: Such a forecast would be “unprofessional.” The startups are at an early stage, he said, and the aim is to make sure that the founders still hold at least half of the shares when the investors come in, so that they stay motivated. From that starting point, there is no way to predict when an exit will happen, he said.

Nor would he commit to a blanket figure for expected returns. It depends on the type of exit, he said. In a good exit, investors get back more than they put in; a bad one means a write-off. Which of the two will happen cannot be foreseen at the time of investing. That holds true even when a startup raises money in follow-on rounds at ever higher valuations. Such valuations show what new investors are willing to pay. A gain is realized only when shares are actually sold and the proceeds reach the investors.

During the Q&A, La Marca could not say offhand how many investments had turned out well or badly up to that point. Under the equity model, which had existed for only a few years at the time, no significant exit had materialized yet, he said. As a success from the days of the earlier loan model, he cited the Berlin food startup KoRo, to which Companisto investors had made loans in 2018 and 2019. Strictly speaking, though, he noted, the repayment of a loan is not an exit.

Asked about bad exits, he acknowledged that not every investment ends in an exit. There had also been write-offs, he said, and there had indeed been asset sales and liquidations. That was “a common risk.” When another participant asked how many investments had gone wrong, he again gave no figure. They were all high-risk investments, he said, and Companisto said so explicitly. Anyone familiar with startup investing knows that some investments fail or don’t develop as hoped. “That’s the business,” he said.

Before an exit, it is difficult for investors to get their money out. At Companisto, they can offer their investments for sale on the secondary market; whether a buyer can be found there, and at what price, is an open question.

Conclusion

An acquisition announcement on its own says little about what reaches the investors. Despite good headlines, an asset deal may yield little for the shareholders, and even when shares are sold, the position in the waterfall determines who gets paid first and how much is left for everyone else. For investors with profit participation certificates, the certificate terms also matter. A drag-along clause does not guarantee a sale if a shareholder digs in their heels.

Anyone investing through Companisto doesn’t have to negotiate such clauses themselves. The platform does that in the funding rounds it leads for its investors. The agreements may include an accelerated exit clause under which shareholders and investors, with the agreed majorities, can send an exit advisor out to look for buyers. Whether and when a buyer turns up is not written in any contract.

Investors should therefore invest only money they can do without for many years and spread it across several investments. A total loss is possible with any single investment.

Note: This article is based on the Companisto masterclass of July 9, 2024. Assessments of market practice and contract design reflect the situation at that time; information on the legal and tax situation is as of October 2026. Past results of individual investments are not a reliable indicator of future results. This text is for general information purposes only and does not constitute legal, tax, or investment advice. Acquiring startup investments involves significant risks and can lead to the total loss of the capital invested.