Understanding Liquidity Events: Definition and Types

Written By:
February 25, 2024
Understanding Liquidity Events: Definition and Types

A liquidity event is a major milestone for any private company. After years of effort building the business, it's an opportunity for shareholders to realize returns by converting their ownership into cash. But not all liquidity events are created equal. These events allow startup stakeholders to recoup returns on years of effort and unlock the value created by the company.

A liquidity event refers to any transaction where owners and investors can convert their equity stake in a private company into cash or other liquid assets. The most common types of liquidity events are mergers & acquisitions/ exits, IPOs, and secondary transactions.  

For startups, timing and selecting the right type of liquidity event requires careful strategizing to ensure the best possible outcome. This guide will examine the most common types of liquidity events, including how they work for startups and real-world examples.

What is a Liquidity Event?

A liquidity event allows startup owners and investors to convert ownership of illiquid private company stock into cash or another form of immediate value.  

These transactions often occur when companies reach significant milestones such as initial public offerings (IPOs), mergers and acquisitions (M&As), or buyouts by private equity firms.  

They represent opportunities for founders, employees, and early-stage investors to realize gains from their investments while also providing capital infusions that enable businesses to grow and thrive.

Types of Liquidity Events

The three main types of liquidity events are: Mergers & Acquisitions (M&A), IPOs, and Secondary transactions.

1. Merger and Acquisition (M&A)

A merger and acquisition (M&A) is a type of liquidity event where one company acquires another, either through friendly negotiations or hostile takeovers. M&As are often used by companies to expand their market share, acquire new technologies, or eliminate competition. They are the most common and straightforward liquidity path. There are several types of M&As:

  1. Horizontal Merger: In a horizontal merger, two companies in the same industry merge to create a larger, more competitive entity.
  1. Vertical Merger: In a vertical merger, a company acquires a supplier or distributor to gain control over the supply chain.
  1. Conglomerate Merger: In a conglomerate merger, two companies in unrelated industries merge to diversify their operations.

2. Initial Public Offering (IPO)

An initial public offering (IPO) is a type of liquidity event where a company goes public by selling shares to the public via stock exchanges. IPOs are often used by companies to raise capital for expansion or to provide liquidity to early investors. There are two subtypes of IPOs:

  1. Traditional IPO: In a traditional IPO, investment banks underwrite the offering and sell shares to institutional investors and the public. The company sets the offering price, and the shares are sold to the highest bidder.  
  1. Direct Listing: In a direct listing, the company goes public without the involvement of investment banks. Instead, existing shareholders sell their shares directly to the public. The company does not raise any new capital in a direct listing.

3. Secondary Transactions

Secondary market transactions refer to the buying and selling of existing investor shares in a private company, rather than the company issuing new primary shares. This provides liquidity for shareholders without a major event like an IPO. There are two main types of secondary sales - structured liquidity programs and direct secondary sales.  

  1. Structured liquidity programs like tender offers are initiated by the company to facilitate organized share repurchases or sales to new investors. Tender offers involve a set price and SEC disclosures to aid buyers and sellers.
  1. Direct secondary sales occur independently between investors without company involvement. An existing shareholder sells directly to a new investor at a negotiated price. This can create complexities around valuations and capitalization tables that the company does not control.

4. Buyout

A buyout is a type of liquidity event where private equity firms purchase controlling stakes in privately held companies, often taking them private again after restructuring. Buyouts are often used by private equity firms to acquire undervalued companies and improve their operations. There are two subtypes of buyouts:

  1. Leveraged Buyout (LBO): In a leveraged buyout (LBO), the private equity firm uses substantial debt to finance the acquisition. The assets of the company being purchased are typically used as security for the debt in an LBO.  
  1. Management Buyout (MBO): In an MBO, the company's management team acquires the company with the help of a private equity firm. The management team often uses their own equity and debt financing to fund the acquisition.


Liquidity events represent pivotal milestones for private companies to realize value and returns on early investments. Acquisitions, IPOs, and secondary sales allow startups to convert vision into tangible outcomes and innovation into impact.  

Liquidity matters because it enables shareholders and stakeholders to access the capital generated by growth and value creation. It facilitates the flow of returns into funding the next wave of ideas, startups, and economic progress.  

When strategically planned, liquidity events can optimize results for shareholders who contributed capital and took on early risks. They create opportunities to transform private ownership into public value.

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