Understanding Startup Exits: What Novice Angel Investors Need to Know

John Bradley "JJ" Jackson

27 Sep 2025 • 3 min read

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When you write your first check as an angel investor, the excitement is real. You’re backing a founder, an idea, and maybe even the next big thing. But here’s the question that matters most: how do you get your money back, hopefully with a return? When?

That’s where “exits” come in. An exit is simply how a startup’s story ends for investors: whether that’s a happy ending with profit, or a less exciting one with loss. As an angel, you need to understand the common exit paths so you can set realistic expectations. Note the different types of exits in no particular order:

Merger - Two companies combine into one larger entity. This can create scale, new markets, or efficiencies. Investors usually get paid in cash, stock, or a mix.

Strategic Acquisition - A larger company buys the startup for its cash, technology, customers, or market share. This is one of the most common positive outcomes for startups.

Secondary Sale - Instead of waiting for the whole company to exit, an early investor sells their stake to another private investor/s. This can provide liquidity before a full exit event.

Initial Public Offering (IPO) - The “dream exit.” The company lists shares on a stock exchange, letting founders, employees, and investors cash out. IPOs are rare but highly rewarding. Truth: the startup is more likely to get struck by lightening.

Management Buyout (MBO) - The management team purchases the company from its owners. Investors might see a decent return, though not usually a windfall.

Bankruptcy (BK) or Crash and Burn - The worst-case scenarios. The company shuts down, sells off assets, and pays creditors. Investors usually lose most, if not all, of their capital. Oddly enough, BKs cost real money and many firms struggle to pay the legal fees. This is very common. The sad symptoms include the founders not responding to calls and emails from the investors, even more silence, and suddenly the website URL is down. They are done. No one home. Rude and sad all at once.

Sale to a Private Equity Firm - Sometimes a company is sold to a private equity firm. Unfortunately, most private equity firms I have encountered are "bottom feeders" on the hunt for distressed companies for sale (firms near BK, founders sick, divorce forces the sale, etc). They pay 10 cents on the dollar and may roll up the firm with other like firms and then re-market the "new" company for a profit. Legitimate? Yes, but it is like preying on the weak in the wild. Ugly.

Founder Continues to Hold - This, in a way, is the most dreaded scenario. The founder owner chooses to continue the business and live off the profits. In reality the angel investor chose the wrong startup and startup founder; this one is a long term hold. Yikes

To the novice angel, remember this: most startups fail. Many startups crash and burn in two years. Most won’t make it to an IPO or flashy acquisition. The majority of exits are break even, while others are total losses.

But the winners, when they hit, can more than make up for the failures. That’s why angels spread bets across multiple startups, looking for the handful that deliver outsized returns (10 to 20 times ROI). Good luck with that.

Exits aren’t just financial events—they’re the end of a company’s story. As an angel investor, your job is to understand the possible endings, manage your risk, and celebrate when one of your startups makes it to the big leagues.

P.S. Most exits of seeded startups take 7-10 years. Note some "exits" give you new stock that is not liquid nor on the public markets. Hit the reset button and once again you have to wait it out. Thus, angel investing is is a long-term, "illiquid", and very risky business. Not for the faint of heart or impatient or uninformed.