DEFINITION of 'Liquidity Event'

A liquidity event is an event that allows founders and early investors in a company to cash out some or all of their ownership shares. The liquidity event is considered an exit strategy for an illiquid investment - that is, for equity that has little or no market to trade on. Founders of a firm, naturally, drive toward a liquidity event and its investors along the way - venture capital firms, angel investors or private equity firms - hope for or expect one within a reasonable amount of time after initially making an investment.

The most common liquidity events are initial public offerings (IPOs) and direct acquisitions by other companies or private equity firms.

BREAKING DOWN 'Liquidity Event'

A liquidity event is most commonly associated with founders and venture capital firms cashing in on their seed or early round investments. The first handful of employees of the companies also stand to reap the windfall of their company going public or being bought out by another company that wants their innovative product or service. In the case of an acquisition, the founders and employees of the firm are usually retained. There would be an initial liquidity event and then additional compensation in shares or cash as they serve out their contracted terms with their new owners. It must be noted that in some cases a liquidity event is not necessarily the goal of founders of a firm, though it certainly is for investors. Founders may not be motivated by the riches that a liquidity event bestows.

Often, the timeline for an IPO is under the control of the company. However, if a company has more than 500 individual investors and more than $10 million in assets, it is required by the Securities and Exchange Commission (SEC) to file financial reports for public consumption. This is known as the 500 Investor Rule. Many believe that this rule was one of the reasons that Google (now Alphabet Inc.) filed to go public when it did, as the company was going to be forced to disclose its financial data to the SEC anyway.

Example of a Liquidity Event

Mark Zuckerberg, his cabal of co-founders and the venture capital firms and individuals listed as major shareholders in Form S-1, Facebook's IPO filing in 2012, had a lot of thumbs up for its liquidity event. The company raised $16 billion in the IPO and began its first day as a publicly-traded company with a valuation of $104 billion. Mark Zuckerberg, who owned 28.2% of Facebook at the time, suddenly found that his net worth was approximately $29.3 billion. This was quite a liquidity event for the 27-year old. The venture capital firms Accel Partners and DST Global had to expand the width of the spreadsheet cell that held the dollar value that its early round investments produced.

RELATED TERMS
  1. Dollar Volume Liquidity

    The price of a stock or ETF multiplied by its daily trading volume ...
  2. Accounting Event

    An accounting event is a transaction that is recognized in the ...
  3. Taxable Event

    Any event or transaction that results in a tax consequence for ...
  4. Liquidation

    Liquidation is the process of bringing a business to an end and ...
  5. Overall Liquidity Ratio

    Overall liquidity ratio is the measurement of a company’s capacity ...
  6. Liquidator

    In the most general sense, a person or entity that liquidates ...
Related Articles
  1. Investing

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  2. Financial Advisor

    Small Cap Investing: How to Think About Illiquidity

    Do your homework, have a long term view, exercise patience, you'll find that investing in small market capitalization stocks is no riskier than investing in large stocks
  3. Investing

    What is Reduced Bond Liquidity and Why Does it Matter Now?

    Reduced bond liquidity caused investor concern earlier in the year, but some signs point to a resurgence going forward.
  4. Financial Advisor

    Why Liquidity Matters in the Corporate Bond Market

    Professional analysis and constant monitoring of liquidity risk when investing in corporate bonds is highly important.
  5. Investing

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  6. Insurance

    IPOs Turning Unexpected Individuals Into Millionaires

    People involved in the smallest way with some social media companies are expected to become rich when the IPOs of those companies are released.
  7. Financial Advisor

    Should My Portfolio Include Private Equity?

    Private equity offers a lot of potential, but is it worth the risk?
  8. Investing

    An Overview of the SEC's New Mutual Fund Rules

    The SEC has released new liquidity rules for mutual funds aimed at reducing risk.
RELATED FAQS
  1. What is liquidity management?

    Take a look at the different definitions of liquidity, and find out how investors and businesses attempt to reduce exposure ... Read Answer >>
  2. What affects an asset's liquidity?

    Learn about what affects an asset's liquidity, including examples of liquid and fixed assets, and how a company's liquidity ... Read Answer >>
  3. Is there a downside to having a high liquidity ratio?

    Find out why it might be disadvantageous for a company to have liquidity ratios that are too high, and learn how to find ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center