What’s an exit strategy? Unfortunately, different people give that phrase different meanings. I always assume that’s about investors getting their money out of a company after it succeeds. Lately I see a lot of people assuming it refers to the original entrepreneurs who started the company. And I once heard one person object to exit strategy as a company moving away from its original location to some other.

It was in my mind over the weekend after some smart people objected to exit strategies in plans for investors. I was surprised. Investors always want exit strategies, I said. No, came the answer, we don’t want entrepreneurs who start a business thinking about how they’ll exit. But that’s not what an exit strategy is, I answered. It’s about early-stage investors getting a return, not about entrepreneurs leaving the company.

So I suggest that we agree on the following about exit strategies:

  1. The exit is about money. Converting ownership, as in shares of ownership, into money. It’s not about going from one place to another. What exits is the money. You could also call it a liquidity event. Money exits. Investors exit with it.
  2. Under normal circumstances, and especially when outside investors are involved, the exit referred to is investors getting their money back out of the company as money. It’s about investors. Founders need exit strategies for the investors, not for themselves.
  3. Sometimes an exit is about the owners, as in the entrepreneurs who started the company. That’s not the normal meaning, but think about aging entrepreneurs, getting tired, thinking about retiring or changing their normal routine, selling their businesses. That’s an exit. And, regardless of age, when the entrepreneur wants to convert ownership to money, that’s also an exit.

See what I mean about confusion?

  • If you define it as the original entrepreneurs, then I agree, it’s kind of off putting. They should build the company first, without thinking of exits, because they believe in it. There’s something unsettling about building a company from the beginning as a temporary thing to generate quick money.
  • But if you’re the entrepreneur, trying to get investors to invest in your company, then you should show them that you understand their need for an exit, and that you have some idea how that might happen.

That’s my opinion about that.

(Image credit: woe/Shutterstock)

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.