Exit routes for Norwegian angels — the realistic picture

The routes out, and how often each happens

A sale turns your holding into cash; lawful dividends, buybacks and liquidation distributions can also return money. Consider the likely routes when investing, including the possibility that winding-up or bankruptcy returns little or nothing.

In that survey, 28 per cent of angels reported an exit in 2018/19; 44 per cent of exits broke even or lost money. Allow for years without liquidity when planning commitments.

Those figures are British and American, from markets with deeper secondary and listing routes than Norway has: read them as the shape of the outcome, not as Norwegian levels. Treat the trade sale as the route to plan for.

The trade sale is the main route out

Almost every angel exit that returns money is an acquisition. A strategic buyer wants a team, a product or a market position that would take longer to build; a financial buyer wants cash flows it believes it can grow. A sale usually starts through one of the following routes.

• An approach from a partner, customer or competitor who already knows the company.
• A process the company runs deliberately, usually with an adviser.
• A failed financing that turns into a sale because the alternative is closing. This one prices worst.

However it begins, a sale brings all the shareholders into the same negotiation. Who can compel whom to join it, and who gets paid first out of the proceeds, was decided years earlier in the documents.

Selling early: the secondary route

Selling before the company exits means finding a private buyer. In practice that is an investor coming into a new round who wants more than the round offers, or an existing shareholder increasing their stake.

There is no market, no quoted price and no obligation on anyone to make an offer. The price is negotiated, and the buyer knows you are the one who wants the transaction, so do not plan on a secondary to meet a cash need on a date.

Under the Companies Act (aksjeloven), an acquisition of shares needs the company’s consent unless the articles of association waive that requirement. By default, the board decides. Consent is deemed given if no refusal is notified within two months.

The other shareholders also hold a statutory pre-emption right over shares that have changed owner, unless the articles provide otherwise. A secondary sale is therefore a negotiation with a buyer followed by a process with the company, and the process can add two months.

The timeline, stated honestly

Plan for years without liquidity, with no assured exit date. A sale can happen early, take much longer than expected or never produce a return.

Published averages appear shorter because they measure investments that have already exited. Mean holding periods of 3.5 years, 3.6 years and 4.5 years in the 2007, 2009 and 2016 studies are averages across investments that actually exited, and failures exit fastest. These averages do not predict how long your remaining investments will take to exit.

Even the celebrated venture outcomes took the better part of a decade to reach a listing, measured from the incorporation date each company states in its own offering document to the date on that document.

• Tesla took about seven years, incorporated in 2003 and priced on 28 June 2010.
• Twitter took about six and a half, incorporated in Delaware in April 2007 and priced on 6 November 2013.
• Facebook took about eight, incorporated in July 2004 and priced in May 2012.
• LinkedIn took about eight, incorporated in March 2003 and priced on 18 May 2011.

During the waiting years, you receive annual accounts and the reporting required by the shareholders’ agreement. Further rounds dilute you unless you participate. Nothing in an unlisted holding converts to cash on demand, so invest only money you will not need for a decade.

Exit thinking starts at entry

The useful question at investment time is who would buy the company, why, and what would make it worth more to that buyer than to anyone else. Check the clauses that determine whether a sale can proceed and how the proceeds are shared.

• Drag-along (medsalgsplikt). A defined majority can compel the remaining shareholders to sell into an agreed offer. A buyer who wants the whole company needs it; its absence can block an agreed sale.
• Tag-along (medsalgsrett). A minority can join a sale on the same terms as the selling majority, which stops a control block being sold over your head.
• Liquidation preference (likvidasjonspreferanse). Decides who is paid first out of the proceeds. A modest exit can be consumed entirely by preferences before ordinary shares receive anything.

Drag-along and tag-along need agreed terms. A shareholders’ agreement binds its parties; putting a clause in the articles raises separate validity and consent questions. Check the drag and tag guidance before assuming a majority can impose either on existing holders.

• On a first investment, find all three clauses in the shareholders’ agreement or the articles. If they are not there, they do not exist.
• On any investment, ask the founder who would buy the company and why. If there is no answer, the exit is yours to think through, and the price should reflect it.
• Leading or in a syndicate, check the drag-along threshold against the group’s combined holding, so you know whether the group can be dragged, or can drag.
• With preferences ahead of you, work out what the company has to sell for before your ordinary shares receive anything.

When the exit is a write-off

A solvent winding-up and a bankruptcy both bring the company to an end, but can leave shareholders with different recoveries. A winding-up under the Companies Act is resolved by the general meeting with a two-thirds majority, and creditors are notified through the Register of Business Enterprises.

In a solvent winding-up, shareholders receive only the surplus after creditors are covered (aksjeloven § 16-9). A company closed with assets remaining can therefore return capital.

A bankruptcy is a creditors’ process. The estate pays claims in the statutory order of the Creditors Recovery Act (dekningsloven). Share capital is not a claim in that order: shareholders have only a residual interest after creditors, and commonly recover nothing.

A loan you made to the company is different. It is an ordinary claim, unless you agreed that it ranks behind the other creditors (dekningsloven § 9-7).

A winding-up and a bankruptcy have different tax timing. In a solvent liquidation, realisation is normally timed to the distribution decision after debts and the creditor period are dealt with. Bankruptcy is normally treated as realisation at nil in the opening year, subject to the returned-estate exception. Either route can leave a deductible personal share loss.

Confirm the realisation and tax treatment for your holding. A company within the participation exemption does not deduct the share loss; neither route is invariably later than the other.

Whether that deduction is available at all turns on whether the shares were held personally or through a holding company, so the structure chosen at entry decides what a failure is worth at tax time. Both outcomes are normal in a portfolio built on the assumption that most positions return less than their capital.