What is Harvesting?
Harvesting, also known as an exit or liquidity event, is the act of cashing out of an ownership position in a company.
How Does Harvesting Work?
For example, let’s say John Doe and Jim Smith sink their life savings into opening Company XYZ. They work 80-hour workweeks for 10 years, plow back all the company profits into hiring more people and launching new products, and take only small salaries to keep the company afloat in lean times.
After 10 years, the company has grown to a value well beyond the $100,000 John and Jim scraped together to start the company. Company ABC expresses an interest in buying Company XYZ, and John and Jim see the opportunity as a chance to harvest their investment in the company.
Accordingly, Company ABC makes an offer of $14 million for the company. Because John and Jim are 50/50 partners, each would walk away with $7 million before taxes. The transaction allows them to cash out and harvest the fruits of their decade of blood, sweat and tears.
Harvesting doesn't always have to occur via a merger. Investors can also harvest their success via initial public offerings of stock (IPOs) or the sale of their positions to third parties.
Why Does Harvesting Matter?
The opportunity to harvest an investment in the future is what feeds dreams of entrepreneurship and encourages companies to take chances. In turn, harvesting rewards hard work and innovation. Most venture capital and private equity investments are made with a harvesting date in mind.
