Start-up founders and their backers traditionally plan for an “exit”—either through an Initial Public Offering or a sale to a strategic buyer—because that is how early investors and employees convert paper wealth into cash. But in recent years, the startup exit playbook has changed.
Under the Biden administration, antitrust enforcers, worried about the growing dominance of Big Tech, stepped up enforcement of startup acquisitions. The FTC and DOJ’s Antitrust division under Lina Khan and Jonathan Kanter, respectively, sued to block more startup deals, settled fewer cases via consent decrees, and made changes to the merger review process that increase cost and uncertainty. Between 2012 and 2019, enforcers challenged only three startup acquisitions. Between 2020 and 2023, they challenged 14.
So how did startups respond? Since antitrust restricts M&A but not IPOs, one might expect startups to shift from M&A exits to IPOs. But IPO activity has not increased. In a new article forthcoming in the NYU Law Review, Brian Broughman, Matthew T. Wansley, and Samuel N. Weinstein demonstrate how startups responded to the antitrust crackdown by choosing no exit.
Their article “No Exit” details how startups and would-be acquirers have developed new strategies to achieve their goals, focusing on four trends that arose in the wake of stronger enforcement.
Employee Tender Offers
In an employee tender offer, a startup lets its employees cash out some or all of their shares while the startup remains private. Once rare and limited to founders and other large shareholders, the secondary market for startup equity has multiplied in value. Today, tender offers are increasingly available to a broad range of employees holding equity compensation.
Continuation Funds
Continuation funds let VCs stay invested in their portfolio companies longer than traditional venture funds allow. These funds help startups face less liquidity pressure and postpone exits.
The Centaur Structure
Broughman and his co-authors describe a “centaur” as a private company funded primarily by public company cash flows. The two largest centaurs are OpenAI and Anthropic; the former has raised $13 billion from Microsoft, while the latter has raised $8 billion from Amazon and $3 billion from Google. The centaur goes beyond traditional corporate VC investment, crowding out other investors and, as the authors put it, “tying the fate of the startup and the public company with a deep commercial partnership.”
The Reverse Acquihire
In this kind of deal, a large tech company persuades the founders and key employees of a startup to quit en masse. The company then hires the former employees and pays a fee to license the startup’s technology that acts as a means to pay off its VCs. “It’s becoming popular— Microsoft, Amazon, Alphabet, and Meta have all used it,” the authors note.
Why the No Exit trend matters
The authors argue that this new era in the startup ecosystem has transformed the divide between private and public companies in ways that carry significant implications for public policy.
“Antitrust enforcers need to consider the hydraulic effect of their actions,” they write. “Challenging a startup acquisition doesn’t just affect that deal. It also affects how founders and VCs perceive the exit options of other startups.” Changes to the government’s merger review process add costs, time, and uncertainty that can reduce the appetite for exits through acquisition, which in turn impacts decision-making for founders and VCs.
They also argue that certain circumstances demand that enforcers be more aggressive to prevent reverse acquihires and centaurs that can harm or neuter competition. Specifically, they encourage antitrust enforcers to pursue companies seeking to circumvent Hart-Scott-Rodino (HSR) filing requirements.
Lastly, they note a concern regarding transparency. “In the old venture capital cycle, by the time a startup’s technology began to significantly impact society, it would have been exposed to the scrutiny of the public markets,” they write. “Today, some of the most important firms developing artificial intelligence are being funded by public companies, but because the AI firms themselves are still private, they can keep the public in the dark.”
“No Exit,” forthcoming in the NYU Law Review, is authored by Brian J. Broughman, Matthew Wansley, and Samuel Weinstein. Brian Broughman is a Professor of Law at Vanderbilt Law School.
