DEFINITION of Liquidity Path

Liquidity path is the route to monetization for company founders or owners. The most common liquidity paths for early- to mid-stage companies are acquisitions by a larger company and initial pubic offerings (IPOs). Without a path to liquidity, private company owners may not be able to convert their ownership in the company to what may be important to the founders and what is absolutely vital to venture capital investors - cold, hard cash.

BREAKING DOWN Liquidity Path

Most private companies of a sufficient size are constantly evaluating different liquidity paths. Some owners may simply be looking for a way to "cash out," or looking to the liquidity achieved in an IPO to help fund future business growth and expansion efforts. 

The state of the overall economy and the stock markets may affect the timing and direction of a liquidity path. If the stock market is weak, investors may have little or no appetite for IPOs, making that option less favorable because the company would likely not receive what it believes a fair price for its shares. The company could choose to wait out the markets, or change course and sell to another company or private equity investor directly. On the other hand, if the market is hot for a public offering for a particular company (e.g., a tech company that dominates an end-market) or if a startup is growing so quickly that a larger company simply must buy it, the path to liquidity could be short and sweet for the founding members and venture capitalists who supported the firm early on.

It must be noted, though, that disputes among the founders and early investors may arise regarding the length and direction of the liquidity path. Some may want to monetize sooner rather than later, while others could prefer a longer gestation or maturation period for the company with the hope that the valuation will continue to increase.