An angel investor asks: When is the right time to cash out?

Q. We are long-term investors. One of my companies is doing amazingly well and has reached unicorn status. It just raised a great round and the new investor is offering to buy back shares from current investors. Should I consider doing this?

–Angel Investor

Dear Angel Investor.

Maybe you should consider this, though I need a lot more information to make a recommendation.

Some things to think about:

First, what did you put in and what are your shares currently worth? Are you satisfied with that return?

What are the prospects of the company? If it just raised a great round that means at least someone thinks the prospects are much bigger than the current size as investors want to see significant return on their capital. Therefore, my default answer to your question is no, don’t sell because this company will probably become more valuable, not less.

Is there a discount to the latest price from the new investor? We often see something like 10% to 20% off the price and if the company is great, I generally don’t want to receive a discounted price.

I don’t know what your liquidity status is. Do you need the money? If so, then it may make sense to cash out, or at least take something off the table to cover your investment and let the rest ride.

Also consider your portfolio concentration. Is this one investment worth too much of your portfolio, or are you comfortable losing it all if the company doesn’t succeed? As always with investing, it’s prudent to have risk spread across companies and strategies.

Just to share my own experience here, in the 11 years since I founded Webb Investment Networks (WIN) we’ve been offered a dozen or so of these deals. It’s rare that we say yes, but sometimes we do. (We have done two of these tender offers.) When making your decision it’s important to weigh all the options, make the decision, and move on. Do the best you can in this moment, but the truth is you will only know if you made a smart decision years from now.