Where can the liquidity come from?
As in other models, liquidity in steward-owned companies can come from multiple sources: the company’s own cash flow, new investment or refinancing (whether equity or debt), the secondary market – or in some cases, even an IPO, though typically without voting rights. A sale to another steward-owned company is also a possibility.
While investment contracts and conditions can certainly be passed from one investor to the other, there is no way of speculating and liquidating investments by selling the whole company (including control over it) for personal gain. A structured exit can also involve secondary markets where financial shares or contracts are traded but the company itself remains in the hands of the stewards. Although most of the contracts we currently see are structured without, market development is expected to create more opportunities for liquidity to come from secondary sales or future investment rounds, providing investors with alternative options.
Naturally, structuring an exit in steward-ownership-aligned financing is closely tied to considerations of investment returns. When companies design their return limitations, they also take into account what the company can realistically afford to repay in the future.
Before even starting to design a structured exit scenario, it can be helpful to first consider where liquidity for investors can come from:
The simplest and most direct way to provide liquidity for investors is from money generated through the business model of the company. If a company has sufficient cash reserves, they can be used to pay out the investors. Similarly, parts of revenues or profits can be used to pay out investors over time.
Often, the company still needs its cash flow to develop and grow further and can’t afford to already put liquidity into paying back investors. In these cases, a further financing round might be called for.
- Debt: A common way to recapitalize more mature companies is to buy out earlier, more “expensive” investors by taking on debt, which usually comes with lower capital costs. This works well if the company has a positive cash flow or assets that can secure a loan with a reasonable interest rate.
- Mezzanine capital or non-voting equity: A new financing round with more beneficial conditions can be used to provide early investors with some liquidity already through partial repayments as it grows and raises larger amounts of capital. This relieves the return pressure for early investors, while ideally securing the company cheaper capital for continued growth.
If the financing instruments used are tradable, investors can also sell their investment shares or contracts to other investors, thus receiving back liquidity.
Steward-owned companies do not allow the sale of their control. This does not, however, preclude a company from offering shares on the public market. Indeed, roughly 60 per cent of the value of the Danish stock market value is derived from steward-owned companies. These and other mainstream companies have opted to offer either strictly limited and minority-controlling interests or non-voting economic shares on the public market. The latter is the preferred method for steward-owned companies, as it enables investors to capture gains from valuation increases without compromising the autonomy of the company.
In some cases, a steward-owned company may take over another if they share a common purpose and operating philosophy. In these cases, the new parent company may take on additional capital, or use cash reserves to provide liquidity to investors and founders of the company that is being acquired. Unlike a traditional exit, this transaction aligns with steward-ownership principles, as control isn't sold for personal financial gain – given the asset lock already in place – but rather to support the long-term success of the company. In some cases, a larger steward-owned company may simply be the best next steward for a steward-owned start-up. Since the acquiring company is steward-owned itself, the asset lock remains intact even after the acquisition took place, ensuring that the acquired company’s wealth stays within the overall business and control remains with those committed to the companies’ complementary or shared mission, without allowing the stewards to personally profit from the acquisition's value.
With the above points in mind, think carefully about how much money you really need and ensure that you only raise what your company can sustainably manage and pay back in the future. Capital costs – such as those needed to buy out investors – can be significant, making careful planning of the next steps essential.