What is a Liquidity Event?

A liquidity event is a term used in corporate finance to describe many different events. The two primary events that fall under the liquidity event umbrella are the purchase of a corporation and an initial public offering.

An initial public offering is the first sale of the common shares of a corporation to public investors. Any subsequent public issuances of shares is called a secondary market offering. An initial public offering is intended to help raise capital necessary to fund the corporation. It is an effective means for raising capital, but requires adhering to strict legal regulations and fulfilling extensive amounts of reporting requirements.

In general, a liquidity event is the exit strategy used by a startup company. This is because a liquidity event often results in the conversion of ownership equity previously held by the founders of the company. By means of a liquidity event, the initial investors and owners of the company are able to change their business equity into cash. It can also be a means of transferring the burden of ownership of a corporation or business that may have been performing unfavorably.

A liquidation event is most common with a startup company because, by strictest definition, a startup company is one that requires little money to get started, but is of high risk and can result in a higher return on investment. A typical company, on the other hand, has a return on investment that is more proportionate to the initial investment and is not of as high a risk. As such, it is much more likely for the owners of a startup company to wish to get out from under the business through a liquidity event. Similarly, the owners of the startup company may perform a liquidity event in order to obtain the money their business has earned.

A liquidity event is not the same as the liquidation of a company. When a company is liquidated, the business is discontinued and does not change ownership. With a liquidity event, the business is continued, but under new ownership.