Understanding Startup Investment and Exit

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Looking for hidden gems

If you’re interested in startups, you’ve probably heard of investment and exits at least once. Let’s take a look at how they work.

Example

Company capital

Item	Value
Par value	1,000 won
Shares issued	100,000 shares
Capital	100,000 shares x 1,000 won = 100 million won

A corporation sets its capital and issues shares that make up that capital.

Raising investment

Item	Value
Par value	1,000 won
Shares issued	100,000 shares
Capital	100,000 shares x 1,000 won = 100 million won
Pre-money valuation	10 billion won (based on investor assessment)

Capital and enterprise value are not the same thing. (Capital ≠ enterprise value)

Unlisted startups have no market price (stock price).

So raising investment is essentially the process of getting the market (investors) to agree on “how much our company is worth.”

For public companies, the stock price is formed by supply and demand, but for startups, raising a funding round effectively acts as the “price-setting” mechanism.

Let’s say an investor values the company at 10 billion won and invests 2 billion won, and the company issues new shares to fund it. (Existing shares could also be sold instead.)

Issuing new shares

Category	Shares	Ratio
Existing shareholders	100,000 shares	83.3%
New investor	20,000 shares	16.7%
Total	120,000 shares	100%

Price per share = 10 billion won / 100,000 shares = 100,000 won/share

Investment amount 2 billion won ÷ 100,000 won per share = 20,000 new shares issued

Issuing new shares dilutes existing shareholders’ stakes, so when founding a company, the founder’s equity ratio needs to account for future share issuances.

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In the example above, none of the existing shareholders have exited yet.

But by re-evaluating the company’s valuation during the funding round, the existing shareholders’ shares — originally acquired at 1,000 won each — are now valued at 100,000 won, giving them a potential gain.

Companies usually raise money at a higher valuation each round (in the example, from 100 million to 10 billion),

but if business performance or market conditions worsen, a company may raise its next round at a lower valuation than the previous one. This is called a down round.

A down round is often unfavorable for existing shareholders, but at that point, the company’s survival matters more than valuation damage.

Exit

Exit = converting to cash

For early-stage investors like angels and VCs, the main goal is realizing returns through an exit.

And for founders and early team members, an exit is also an important goal and motivating factor.

Let’s look at the different ways to exit.

The company buys back shares directly

This is when the company buys back existing shareholders’ shares (i.e., old shares) itself.

It’s used to settle things with departing employees, clean up early shareholders, or cash out stock options.

Selling old shares to a new investor (partial exit during a funding round)

When a new investor comes in, part of the funding is allocated to buying old shares instead of issuing new ones.

This method is used when founders or early investors want a partial exit.

Example: Of a 10 billion won Series B round, 8 billion won goes toward new shares and 2 billion won toward buying the founder’s old shares.

M&A

This is when another company acquires the entire company, buying up its shares.

The startup exits by selling its technology, market position, and team.

Example: If Company A acquires a startup at a 30 billion won valuation, a shareholder with a 1% stake receives about 300 million won.

IPO (going public)

After going public, shares can be freely traded on the open market.

Right after listing, shares typically can’t be sold for a set period (a lock-up).

An IPO is a highly successful exit, but the odds are low and it needs to be viewed as a long-term outcome.

From the investor’s perspective

From an investor’s perspective, the company’s value needs to grow relative to the time of investment, and there needs to be a clear exit roadmap.

In other words, an investment only becomes attractive when both “the company’s potential for growth” and “an exit through which that growth can be cashed out” are in place together.

M&A

In an M&A, investors look for things like:

• A company with unique technology/IP/data that a large corporation would want to acquire
• A service that could become a “strategic piece” within an industry

IPO (going public)

In an IPO, investors look for things like:

• A structure for sustained revenue growth
• Building out ESG, IR, and transparent accounting systems
• A company securing a dominant market position

Selling old shares to a new investor

In an old-share sale, investors look for things like:

• The existence of a pool of follow-on investors (VCs, CVCs, strategic investors, etc.)

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PS

Behind every investment decision, there’s always the question of “exit potential.”