A liquidity agreement is a contract that outlines the process of selling or transferring shares in a private company. It is designed to ensure that the company`s investors have a way to sell their shares and have access to cash when needed.
The goal of a liquidity agreement is to provide a fair and organized process for shareholders to sell their shares in a company. This is important because many private companies do not have a market for their shares and it can be difficult for investors to sell their stake in the company.
Liquidity agreements can take many forms, but they typically include provisions for how shares can be sold or transferred. For example, a liquidity agreement may require that shares be first offered to existing shareholders before they can be sold to an outside party. This ensures that existing shareholders have the opportunity to maintain their ownership percentage in the company.
Another common provision in a liquidity agreement is a "tag-along" right. This allows minority shareholders to sell their shares in conjunction with a sale of the company by the majority shareholder. This ensures that minority shareholders are not left behind in a sale of the company.
Liquidity agreements can also specify the valuation of the company and the process for determining the value of shares. This is important because it ensures that investors are receiving fair value for their shares.
In addition to providing a fair and organized process for selling shares, liquidity agreements can also benefit companies by providing a way to retain and attract investors. Knowing that there is a process in place for selling shares can make investors more comfortable with investing in a private company.
Overall, a liquidity agreement is an important tool for private companies and their investors. It provides a way to ensure that shareholders have access to cash when needed and provides a fair and organized process for selling shares. Understanding how a liquidity agreement works is important for any investor in a privately held company.