What Is A Liquidity Event?

What Is a Liquidity Event?

A liquidity event is a business milestone that allows shareholders—such as founders, employees, and investors—to convert their equity into actual cash. In short, it’s when you can finally sell your shares and potentially realize the value of your stock options, RSUs, or other equity.

Liquidity events are especially important in private companies, where employees may hold valuable equity on paper, but can’t access its cash value until there’s a formal exit or transaction.

Common Types of Liquidity Events:

• Initial Public Offering (IPO):
  The company lists on a public stock exchange, and shares become tradable. This often opens a new window for employees to sell vested equity after a lockup period.
• Acquisition (M&A):
  The company is bought by another business. Employee shares may be bought out, converted to shares in the acquiring company, or canceled depending on the terms.
• Secondary Sale:
  In private companies, shareholders might be allowed to sell their shares to outside investors in a controlled sale, even if there’s no IPO or acquisition yet.
  

Why Liquidity Events Matter:

• They determine when and how you can actually benefit from your equity.
• The value of your shares becomes real, not just theoretical.
• Tax treatment often hinges on the type and timing of the liquidity event.
  

Things to Watch For:

• Lock-up periods: After an IPO, employees may have to wait 3–6 months before selling shares.
• Acquisition terms: Not all buyouts are windfalls—sometimes shares get diluted, restructured, or cashed out at less-than-expected values.
• Private companies: If no liquidity event occurs, your equity could remain illiquid indefinitely.
  

Understanding liquidity events is key to evaluating the true value of your compensation and making smart decisions around exercising, holding, or selling your equity.