The moment of the cash out: key legal factors for a successful exit of partners and investors

The moment of the cash out: key legal factors for a successful exit of partners and investors

In every startup, the moment of “cash out” arrives, meaning the opportunity for founders or investors to obtain liquidity by selling their stake and reaping the rewards of their effort. Achieving a successful exit requires careful planning of various legal aspects – from what has been agreed between partners to the tax implications – in order to avoid setbacks and ensure an orderly transition.

When is a cash out feasible?

A cash out refers to when an entrepreneur or investor decides to exit the project and recover part of the value created in the company. Its feasibility depends on the timing and evolution of the business: in the early stages, it is usually not viable (the startup still needs the capital to grow), but in later stages with good traction, it is possible to provide liquidity to the partners. For example, in later investment rounds, it is common to agree that part of the new investment will be used to buy existing shares from the founder or other shareholders (partial cash out).

It is also possible when a buyer becomes interested in all or part of the business. If the startup receives an attractive acquisition offer, the partners can evaluate it, but they must review the shareholder agreement. This agreement often foresees exit scenarios and sets rules (right of first refusal, drag-along clauses, etc.).

For instance, it often grants other partners a preferential right to purchase if someone wants to sell their shares. Additionally, the law imposes limitations on limited liability companies, requiring the consent of other partners or allowing them to step in and buy when someone transfers their shares. Therefore, it is crucial to check which restrictions from the shareholder agreement or bylaws apply (e.g., vesting periods, veto rights, etc.). Ideally, exits should be planned gradually to avoid jeopardizing the project’s continuity.

Exit options for founders and investors

The main exit routes to materialize a cash out, depending on the partners’ profile and the startup’s circumstances, are:

Sale of the company to a third party

This is the classic exit method. It involves selling the entire company or a majority stake to an external buyer (e.g., a company in the sector or a fund). If the majority shareholders accept an offer, they can use the drag-along clause to force minority shareholders to sell under the same conditions, preventing a minority from blocking a beneficial sale. Meanwhile, the minority shareholders have the tag-along right, allowing them to join the sale of the majority shareholder under the same terms.

The sale of the company usually involves an exhaustive due diligence process by the buyer, and often the founders need to assist in the transition.

Partial sale of shares

This involves one or more partners selling part of their shares in a funding round to new investors. It is common in later-stage rounds, allowing liquidity for founders or early investors without selling 100% of the company.

An early investor (e.g., a business angel) can thus cash out by selling their stake to an incoming fund, or a founder can sell a minority percentage in an agreed round. These operations must comply with the shareholder protection clauses (drag-along, tag-along, etc.) and typically require the approvals set out in the shareholder agreement.

Regardless of the chosen route, it is essential to prepare the company for the exit well in advance. Any serious cash out will involve a legal and financial audit (due diligence) by potential buyers/investors, who will review accounts, contracts, labor aspects, intellectual property, regulatory compliance, etc. Entrepreneurs need to prepare: organize corporate documentation and address any contingencies before the review. Any major issues discovered in this process could lead to the investor reducing the valuation or even withdrawing from the deal.

Another key area is taxation. The capital gains obtained from the sale of shares are taxed as a capital gain in the seller’s personal income tax (19%–26%, depending on the amount); if the seller is a company, the gain is included in the corporate tax base (25% rate). It is advisable to plan the operation with tax advisors to optimize taxation and properly meet formal obligations.

Legal recommendations for an orderly exit

Follow these tips:

1. Review the shareholder agreement and bylaws to ensure they include exit mechanisms and understand the applicable restrictions (drag-along, tag-along, preferential purchase rights, vesting, etc.). It’s better to negotiate these with legal advice to prevent conflicts.
2. Align expectations between the parties: an exit should be as consensual as possible. Coordination between investors, founders, and the company is crucial to choose the best timing and form of the exit.
3. Keep things in order: prepare the company’s information and documentation in advance. Resolve pending contracts, register intellectual property, and correct any non-compliance. If possible, conduct an internal due diligence to ensure everything is in order.
4. Seek professional advice: rely on legal and financial experts during the process. Aspects such as valuation, contract drafting, understanding complex clauses (e.g., preferred liquidation), or evaluating tax impacts require experience. A mistake due to lack of advice can be very costly.