Protects both sides
The founder from sudden withdrawal, the investor from their own capital being torn out mid-build.
Volume 03, Chapter 10
Lock-In Periods and Exit Windows
Locked money builds; nervous money wrecks. An investor unwilling to lock is telling you their money is nervous.
The Golden Rule
Investment capital is like cement being poured. Pull it out while wet and you don't get money back, you get rubble.
A lock-in makes the capital stay long enough to do its job; an exit window makes the eventual departure orderly instead of catastrophic.
The lockHow long the money needs to prove itself, 2 to 7 years typically.
The forkAt expiry, stay invested or begin an orderly exit.
The windowPayment over a schedule the worst month can carry.
Exit pays current value
More than invested if the business grew, less if it shrank, that's equity, both directions.
Dividends don't reduce the payout
Past distributions were rent the money earned, not repayments of the slice.
Never promise immediate payment
An exiting investor isn't an emergency; a business emptied of cash is.
1
Definition
Imagine receiving ₦5,000,000 today, and six months later the investor calls and says, "I want my money back now." That sentence could destroy the business: the money is no longer sitting in a bank account. It has already become half-installed machines, fabric on order, and a deposit on a second workshop. There is nothing left to simply hand back.
A lock-in period is a contractual promise that the investor will not withdraw their investment, sell their shares, or demand redemption for a specified number of years. An exit window is the pre-agreed, orderly process that begins when the lock expires and the investor wants out.
In One Sentence
Imagine receiving ₦5,000,000 today, and six months later the investor says, "I want my money back." That sentence could destroy the business: the money is now machines, fabric, and a second workshop. A lock-in makes the capital stay long enough to do its job; an exit window makes the eventual departure orderly instead of catastrophic, priced by an agreed method, offered to the founder first, and paid over a window the business can survive. This is one of the most overlooked clauses in small-business investing, and one of the most protective.
2
Why Locks Exist: The Wet Cement Explanation
Investment capital is like cement being poured into a foundation.
For a while it is wet: the ₦5,000,000 has become half-installed machines, fabric on order, a deposit on the second workshop. Pull it out now and you don't get money back, you get rubble, and the building collapses with it.
Give it time to set, and the same cement holds up a structure worth far more than what was poured in.
A lock-in is simply both sides agreeing, in writing, how long the cement needs. It protects the founder from a sudden demand, and it protects the investor too, because the worst thing for their ₦5,000,000 is a panicked, half-built business trying to refund it.
Memory Trick
Locked money builds; nervous money wrecks. An investor unwilling to lock is telling you their money is nervous (Chapter 9, Q5).
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How Long Should the Lock Be?
There is no universal rule, the period should match how long the money realistically needs to start producing value:
About 2 Years
Short-cycle expansion: stock, marketing push, small equipment.
Golden Crust's oven3-5 Years
A growing business's step-up: new premises, several machines, new staff.
Mr B's actual lock5-7 Years
Heavy, slow-maturing assets: property, major plant, farm infrastructure.
Green Fields' irrigation| Lock length | Fits when the money funds... | Example |
|---|---|---|
| about 2 years | Short-cycle expansion: stock, marketing push, small equipment | Golden Crust's second oven pays back in 18 months |
| 3–5 years | A growing business's step-up: new premises, several machines, new staff | MANIAC MINDZ's actual 5-year lock on Mr B's investment |
| 5–7 years | Heavy, slow-maturing assets: property, major plant, farm infrastructure | Green Fields' irrigation system |
The test: by the end of the lock, the investment should have had a fair chance to prove itself, so the exit conversation happens about results, not about impatience.
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The Exit Window: What Happens When the Lock Expires
| Step | What the Agreement Should Say |
|---|---|
| 1. Written notice | Exit begins with a letter, not an argument, e.g., "90 days' written notice of intention to exit." |
| 2. Price the shares | How is decided in advance: an agreed formula, or an independent third-party valuation if the parties can't agree (Chapter 11 explains the methods). |
| 3. Founder's right of first refusal | The shares must be offered to the founder (or company) first, at that price, before any outsider, keeping control of who becomes a co-owner. |
| 4. Payment window | The business pays over a survivable window: 90 days, 180 days, 12 months, or instalments, never "immediately." |
Warning
Step 4 is where founders sink themselves through guilt. An exiting investor is not an emergency; a business emptied of cash is. The payment window exists so honoring the exit never becomes Chapter 6, insist on instalments long enough that the worst month can carry them (the same test as any debt).
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What Does the Exiting Investor Actually Receive?
Not necessarily what they put in. It depends entirely on the structure:
| Structure | The Exit Payment Is... |
|---|---|
| Loan | Principal + agreed interest, the arithmetic was fixed on day one (Chapter 5) |
| Equity | The current value of the shares, more than invested if the business grew, less if it shrank |
| Redeemable equity | Whatever the buy-back formula says: fair value, or an agreed multiple (Chapter 14) |
Worked example, Mr B exits at year 6. Business valued at ₦35,000,000 (the figure from the case study); Mr B holds 20%.
| Amount | |
|---|---|
| Mr B invested (year 0) | ₦5,000,000 |
| His 20% is now worth | ₦7,000,000 ← what the exit must pay |
| Paid as | e.g., 12 monthly instalments of ₦583,333 |
And the dividends he received along the way? They don't reduce the ₦7,000,000. Dividends were distributions of past profit, rent the money earned while invested, not repayments of the slice, unless the agreement explicitly says otherwise.
If the business had shrunk to ₦15,000,000 instead, his 20% exit would be worth ₦3,000,000, a loss. That's equity, both directions (Chapter 6).
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Common Mistakes
Common Mistake #1: No Lock At All
"He can take his money whenever he wants" turns your equipment fund into money he can pull out at any moment. The cement never gets to set.
Common Mistake #2: A Lock With No Exit Process
The opposite failure: year 6 arrives, the investor wants out, and nothing says how price is set, who buys, or how fast. Now you negotiate the hardest questions at the worst time. Lock and window, always both.
Common Mistake #3: "We'll Value It When We Get There"
The founder thinks the business is worth ₦20M; the exiting investor insists ₦40M. Without a pre-agreed method or independent-valuer clause, this single blank line becomes the lawsuit. (Chapter 11 gives the methods to name.)
Common Mistake #4: Promising Immediate Repayment
An exit paid all at once can cause the very business failure described in Chapter 6. Windows and instalments are not stinginess, they're the reason the promise is keepable.
Common Mistake #5: Forgetting Dividends in the Drafting
Does the investor keep earning dividends during the lock? During the exit window, after notice? Two sentences in the agreement; two annual arguments if omitted.
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Quiz Yourself
Quiz 1
Who does a lock-in protect?
Both sides: the founder from sudden withdrawal demands, and the investor from their own capital being torn out of a half-built (and therefore worthless) expansion.
Quiz 2
Match the lock: (a) irrigation system, (b) stock for the festive season, (c) second workshop + machines.
(a) 5–7 years, (b) about 2 years, (c) 3–5 years, the lock matches how long the money needs to prove itself.
Quiz 3
An investor who put in ₦2,000,000 for 10% exits when the business is worth ₦30,000,000. Assuming plain equity, what does the exit pay, and do past dividends reduce it?
10% × ₦30,000,000 = ₦3,000,000. Past dividends don't reduce it unless the agreement explicitly says so.
Quiz 4
Name the four steps of an orderly exit window.
Written notice → price the shares (agreed formula or independent valuation) → founder's right of first refusal → payment over an agreed window/instalments.
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Practice Exercise
Draft the lock-and-window clause for your own (real or planned) investment, in plain words:
- What is the money for, and how many years does that use need to prove itself? → your lock length.
- Write the four window steps with your numbers: notice days, pricing method (name it now, Chapter 11), who gets first refusal, payment window your worst month can carry.
- Add the dividend sentences: during lock? during window?
- Read it aloud to someone playing the investor (Chapter 9's role-play). Every objection is cheaper today than in year six. Then carry it into the Shareholders' Agreement.
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Quick Summary
Quick Summary
- A lock-in keeps invested capital in place long enough to do its job, wet cement needs time to set.
- Typical locks: about 2 years (short-cycle), 3–5 (growth step-ups, like Mr B's), 5–7 (heavy slow assets).
- Lock expiry is a fork: stay (keep shares and dividends) or exit through notice → pricing → first refusal → payment window.
- Exiting equity pays current value, not the original amount, up or down; past dividends don't count against it unless agreed.
- The payment window is what makes the promise survivable, test it against the worst month, like any debt.
- Lock and window, both in writing: one without the other just relocates the crisis.
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