Exit Strategy

DEFINITION of 'Exit Strategy'

1. The method by which a venture capitalist or business owner intends to get out of an investment that he or she has made in the past. In other words, the exit strategy is a way of "cashing out" an investment. Examples include an initial public offering (IPO) or being bought out by a larger player in the industry. Also referred to as a "harvest strategy" or "liquidity event".

2. In the context of an active trader, a plan as to when a trade will be closed out.

BREAKING DOWN 'Exit Strategy'

1. It's more difficult for a VC or entrepreneur to get money out of an investment because they are generally dealing with private companies . When a firm is private, the shares cannot be sold nearly as easily as when the firm is publicly traded on a stock exchange. So, even though a private startup firm could be worth millions of dollars, the VC/entrepreneur has little access to this wealth. You can think of the exit strategy as the first opportunity to trade an illiquid asset (shares in a private firm) for a very liquid asset (cash).

2. For example, a trader might set a stop-loss order to exit a trade if a stock drops a certain percentage.

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