Liquidity Event

• Published date: 24 January 2024
• Subject Matter: Corporate/Commercial Law, Shareholders
• Law Firm: Schoenherr Attorneys at Law
• Author: Mr Niklas Kerschbaumer and Dominik Tyrybon

A liquidity event refers to a transaction or series of transactions that provide investors, founders and employees with the opportunity to convert their equity interest in a company into cash. Shareholders' agreements typically provide a definition of a liquidity event, the details of which often vary. The parties should pay attention to these definitions, since liquidation preference is triggered in a liquidity event, i.e. liquidation preference outlines the payment hierarchy for shareholders during a liquidity event. Naturally, shareholders at the bottom of the liquidation preference waterfall (such as the founders) have an interest in a narrow definition of a liquidity event, while investors (particularly later stage investors) have an interest in a very broad definition of a liquidity event.

Common types of liquidity events:

1. Exit transaction

An exit transaction is an event where shareholders sell their shares in a company, leading to a change in ownership or control. This strategic move often occurs through an initial public offering (IPO). As an alternative to an IPO, an exit transaction is commonly structured through:

• an exit share transfer, involving the sale, exchange contribution or disposition of shares to a single entity or a group of commercially related individuals;
• an exit asset sale...