Why Buybacks Win
An option for liquidity for high performing companies
The two most common questions I get from investors when raising capital are:
What is your exit strategy?
When will you pay dividends?
It surprises me how many investors ask these questions, even though these are often suboptimal strategies for early-stage growth. It’s a bit like asking a teenager when he expects to retire. It signals a misunderstanding of how value is really created: through retained earnings, reinvestment, and the patient force of compounding.
Let’s start with dividends. The general idea is that a dividend-paying firm should command a higher value because it provides consistent cash returns to shareholders (relates to the Gordon Growth Model). That cash return, in theory, is what makes companies valuable. But this overlooks a key point in reality: even a bad company can pay excessive dividends. Worse, when a great company pays out too much, it diverts capital away from higher-return opportunities within the business, which is a form of wealth leakage. All so investors can collect income.
A typical response to this is that as a company matures and runs out of opportunities, it’s safe to pay dividends. I generally agree. See’s Candy, Coca-Cola, and other mature companies pay dividends to Berkshire Hathaway. This is because Buffett prefers to centralize all capital allocation at the Berkshire level rather than at the individual subsidiary level. If he owned one of them alone and outright, I’d bet no dividends would be paid—that company would likely blossom internally, much like Berkshire itself.
The question is: why stop at “maturity”? I get that some people aren’t as ambitious and would rather sip margaritas on a beach and collect income. But if that’s the path they choose, they should accept that they can’t have it both ways. Something has to give if the company still has room to grow. There are different degrees of maturity—and missing out on those pockets of growth, whether through creating new products, investing in R&D, or acquiring other companies, can be suboptimal for long-term value.
As for exits, an exit is an outcome, not a strategy. Attractive exits are a byproduct of strong company performance and fundamentals. That should be the goal: profitability, growth, and long-term fundamentals. When those are in place, exits tend to come naturally.
I’ve had this discussion with top early-stage and later-stage investors. It’s no coincidence that the top 1% of performers prefer founders who value flexibility around exits. What does that mean? It means a founder understands that there’s value in both current and future performance—and that there’s a price for that future performance. At any point in their journey, founders should recognize that the value they create for shareholders has a price, and that price is based on future expectations. The more long-term and strategic their outlook, the more attractive that valuation becomes.
Planning an exit on day one can lead to more focus on outcomes based on unrealized performance, which can hurt company performance itself. I've seen it happen. Founders chase the exit before they even have a business worth exiting from. They end up chasing false metrics and ignoring their true mission and purpose, which creates a downward spiral.
So what might be a more favorable capital allocation model for a fast growing young company? One that meets both long term investors and those who might rather have the cash sooner?
The whole idea of building a company is to create wealth for shareholders, and wealth is determined by the value of assets you own while you sleep. Sure, personal cash forms part of that, but cash is static. It loses value over time (thanks to inflation) and doesn’t grow on its own. Assets, on the other hand, create value over time. The better the firm performs, the more valuable those assets become, and the wealthier the shareholders get.
But at some point, you have to ask yourself: “When can I buy that dream vacation home? Or buy that car I’ve always wanted?” And as you look at those dreams, you look back at your business and think: “If I take cash out now, am I forgoing future gains that could make me even wealthier?”
So what’s the solution?
Holding equity in a company, especially a small private one, has a key drawback: it’s illiquid. Meaning it doesn’t convert to cash quickly. It may be valuable on paper, but you can’t exactly use it to buy a Louis Vuitton bag or pay for that dream vacation—unless you have a decent salary of course. But chances are, as an early-stage founder, you're paying yourself the bare minimum (and honestly, I’d question your priorities if you weren’t). You can compare it to investing in a home. You never use it to pay for things, but you know it appreciates over time and you can sell it. That’s how companies are treated, except small companies grow much faster and generate much more wealth over a long period of time.
So, going back to the question: what might be a more favorable capital allocation model for a fast growing young company that both pleases growth oriented founders and passive investors?
Assuming of course that the early investors really need the capital, and that the shares are valued well below intrinsic value (with a wide margin of safety).
In simple terms, a share buyback happens when a company repurchases its own shares from existing shareholders. Those shares are then canceled (held as treasury stock). By doing this, the company reduces the number of outstanding shares (effectively shrinking the overall pie) so each remaining shareholder owns a larger slice. That larger slice translates into a bigger share of the company’s profits, benefiting all remaining shareholders. It’s like a backdoor way of creative value.
So why would a company use its hard-earned cash to buyback shares instead of reinvesting in its operations? Because the price offered by the exiting shareholders is lower than the company’s intrinsic value. In other words, the company will only buyback shares if those shares are offered at a meaningful discount, and if that discount offers a better return than any other opportunity available to the business.
The beauty of share buybacks is that they allow early investors to monetize their holdings without interrupting compounding—assuming the company continues to grow with strong fundamentals.
On the flip side, the company benefits by repurchasing shares that are undervalued (well below intrinsic value). Over time, long-term shareholders who choose to stay can become significantly wealthier. Even those who partially liquidate can retain some shares and still benefit from future growth.
Another thing I want to mention is that a company can only do this if it generates internal free cash flows. For early stage businesses, this is rare since cash is used for expansion. However, as an early stage business becomes more profitable over time, there can be options for secondary sales through private channels.
That said (and I want to emphasize this) none of this works if the company’s performance deteriorates. Buybacks only create value when the business continues to perform well, because the very nature of a buyback is that the business believes its own stock is undervalued.
Berkshire Hathaway is a great case study. When Buffett took over the company in 1965 at the age of 34, the average price he paid by the time he gained control was $14.86 per share. It was meant to be a “cigar butt” play, but it turned into something much bigger.
The reason for his eventual control was emotional: it was his way of getting back at the previous owner, who had tried to lowball him on a buyback offer. In response, Buffett began quietly buying shares on the open market until he secured control. Once the dust settled, he realized he had made a major mistake: he now owned a dying textile mill with thin margins, limited cash, and no real future.
So what did Buffett do? He used whatever cash he could extract from operations to buy National Indemnity Company, and discovered he could leverage insurance float to acquire even more businesses. He went on to buy undervalued companies like See’s Candies and GEICO, reinvesting the cash generated from each acquisition. That’s when the power of compounding really began. He consistently redeployed capital into new businesses and never paid a cent in dividends.
Over the course of his Berkshire career, he neither paid dividends nor repurchased shares—until 2018. That year, the board changed its policy to allow share buybacks, as long as (1) the repurchase price was well below intrinsic value and (2) Berkshire maintained at least $30 billion in cash reserves. This marked the beginning of a series of buybacks that increased shareholder value. Between 2018 and 2024, Buffett spent roughly $74 billion on share repurchases.
So how much value did he create?
He bought Berkshire in 1965 at a price of $14.86 per share.
As of June 3, 2025, Berkshire is priced at $746,200 per share.
Now consider that share repurchases only began much later in its life.
Today, a new group of companies are applying Berkshire’s model much earlier. Amazon, SpaceX, Tesla, and Stripe are examples of businesses that don’t pay dividends but instead return capital through share buybacks.
Amazon: Spent about $9 billion on buybacks between 2012 and 2022 — 18 years after its founding.
SpaceX: Began buybacks in 2023, valuing the company at approximately $180 billion, with continued repurchases in 2024 — 18 years after founding.
Stripe: Initiated buybacks in 2025, valuing the company at $91.5 billion — 13 years after its founding.
Berkshire Hathaway: Started buying back shares 46 years after Buffett took control.
2022 Forbes cover of the Collison Brothers
You might ask, “Yes, it is a form of paying back—but this is a long time before I get my money.” The reason those companies took that long is because they wanted to maintain sufficient reserves for higher-return opportunities, which typically come later in a company’s life. Early on, cash burn is higher, and there’s less room for share buybacks.
Stripe is a rare exception. That move signals the company is doing well and probably has sufficient cash for future growth. Here’s a good interview on the topic with Stripe’s President, John Collison.
Bottom line: Building a business is a long-term game—and there’s no way around it. But as a company grows and becomes more profitable, liquidity increases, and the secondary market starts welcoming you. Fundamentals and cash flows drive liquidity, so as a private company owner, you shouldn’t worry about cashing out—as long as the company performs.
I once asked an investor how a founder should construct their personal portfolio, and he used the phrase “forced savings.” Meaning, as a founder, since your equity is growing quickly, you can think of your ownership stake in the company as a form of savings. In other words, as long as you’re properly insured and can meet your personal obligations, you have every right to use your full salary for living expenses—at least until you reach a point where secondary sales or buybacks become viable.
As I close this, I have included a section from the 2012 Berkshire shareholder letter that gives a great summary of Buffett’s views on this, and I encourage all founders and investors to read it.
I hope founders and investors recognize the value of buybacks and how they relate to performance—and understand that compounding takes time. As with all things in life, there are no shortcuts. Those who wait and persevere are the ones who reap the rewards.
But thinking long term doesn’t mean short-term events won’t occur. Liquidity events can happen sooner than expected—but they’re the outcome, not the goal. Focus on the long term, and the rewards will follow.
