After doing the due diligent, selecting, negotiating, and supporting to an early-stage company you are investing in, you are looking forward to seeing the result of your labor: harvesting – the final stage of angel investing business.
In agriculture definition, “harvesting” is the process of gathering a ripe crop from the field.
In business definition, “harvesting” is also known as the exiting or liquidity event. It is the process of cashing out of an ownership position in a company. It is an important part of an investment that involves capturing cash flows, reducing risks, and creating future options.
It would take at least one to ten years in general that the company has eventually grown to a value well beyond the initial price. It rewards hard work and needs to have an effective harvest plan. If the entrepreneur and the investor see the opportunity to harvest their investment by cashing out the fruits of their decade of sweat and tears, it can be harvested via several methods such as public offering of stock or through merger or sale of the company.
* Public offering is a company’s first offer to sell stock to the public. It is not limited to stock offerings but also bonds and a variety of other securities. Public offering is a way to raise capital for companies that need to grow and access cash. If a public stock offering is the first of its kind for a company, it is called an initial public offering (IPO).
* Merger is a corporate strategy of combining different companies into a single company to enhance the financial and operational strengths of both organizations. Because mergers are difficult to implement, most ultimately take the form of an acquisition – the purchase of a weaker company by a stronger company.
* A sale is the transfer of title to a piece of property or performance of a service in return for compensation.
There are seven harvesting methods, in which there are five positive and two negative ones, according to the authors Amis, D. and Stevenson, H. Winning Angels: The 7 Fundamentals of Early Stage Investing. Pearson Education Limited, 2001. There are several alternative scenarios beyond IPO and acquisition with details and examples in the book but here are some basic definitions:
- Walking harvest: the business investors and management team decides to start distributing profits (cash) directly from the business back to the investor. Companies that have little hope of achieving a positive exit also do not provide any current or anticipated investment return but not actually die are called the “living dead”.
- Partial sale: is where the investor’s stake is sold to the company management, to another shareholder, or to an outsider even though the company itself is not sold.
- Initial public offering: The company sells a percentage of its shares which are listed on NASDAQ, NYSE or another exchange, creating a market for investors’ shares.
- Financial sale: The company is sold to a financial buyer who purchases it for its cash flows.
- Strategic sale: The company is sold to an industry buyer who buys it for strategic reasons, such as marketing synergies.
- Chapter 7: this is an option involved in harvesting a bad deal. Chapter 7 bankruptcy results in liquidation of business assets, and investors depending on their place in line, get little or nothing. In extreme circumstances, an investor may need to pay additional expenses to complete the process and shut down the business. Clearly Chapter 7 represents a worst-case scenario.
- Chapter 11: the company is re-organized, the value of the business and ownership are likely to change substantially, and investors will lose a significant amount of potential future investment upside. Following Chapter 11 re-organization, the investor may seek to solely get a return of capital or achieve a very modest investment return as a best-case scenario.
Amis, D. and Stevenson, H. Winning Angels: The 7 Fundamentals of Early Stage Investing. Pearson Education Limited, 2001.