For years sophisticated investors have participated in private offerings and startups. You were mostly limited to doing this as an angel investor or venture capitalist in the past. Now thanks to changes in the laws that govern these kinds of investments, you are able to participate on a smaller scale and put less of your investment capital at risk. This is possible through crowdfunding as an investment. Companies like Republic are pioneering this new startup investment vehicle. It was founded by alumni from the AngelList.
How The Crowdfunding Investment Works
Once you create a complete profile for yourself on the Republic website, you are able to browse through the companies which are raising funds. When you see one that you like and feel has promise, you can start by investing as little as $10 in the venture. Naturally you will invest more than this, but the point is that you do not have to tie up hundreds of thousands of dollars in a single company anymore. The investments through Republic Crowdfunding are open to anyone who is at least 18 years old. The amount that you are allowed to invest over a given year is based on the combination of your annual income and your net worth (minus the value of your primary home).
As with other startup investing projects, you are not able to sell your shares on demand like you could with publicly traded companies. The rules and regulations restrict you from selling your shares in the first year after the offering closes. This means that you need to be prepared to hold on to the investment for at least a year and potentially for a longer time frame. The reality is that as with venture capitalist or angel investing, these crowdfunding investments carry considerable risk and may result in a total loss. It is also possible that you may not be able to resell them if a liquidity event does not occur. These liquidity events are typically either Initial Public Offerings or the company being acquired by another one.
What You Receive for Investing in Startups Via This Crowdfunding
This crowdfunding investment utilizes what is known as a Crowd Safe. When you choose to invest in one of the companies, you become a holder of this security that is not shares of stock. It only becomes stock if the company chooses to convert this safe security into stock in the company. Instead you are receiving a security that is comparable to a convertible note. These types of financial instruments are frequently utilized in startup investing. They are much like loans which are repaid with actual stakes in the company if and when the liquidity event happens. The Crowd Safes do not come with interest rates or maturity dates as do some convertible notes. Instead they feature discounts and valuation caps. Both of these set the maximum size of a stake you would receive in the company as the Crowd Safe converts.
This benefits the startup company that does not have to deal with from hundreds to thousands of shareholders. You as an investor still obtain the identical financial results a shareholder would. The difference is that you get less information and fewer voting rights.
How The Investment Pays Off
In general, you receive returns on the investment if the company in which you invested becomes acquired or a publicly traded company through an IPO. This has to occur for a higher price than the one you paid in your initial investment. Some of the offerings on the crowdfunding platform also include other ways of earning returns, like profit sharing. If you invested $10,000 in one of these Safes when the company was valued for $10 million, and then the company became acquired at a value of $100 million, you would receive either $100,000 in company stock or cash. The choice is based on the company’s decision and the parameters of the particular Safe.
Sometimes a company in this crowdfunding platform may elect to pursue a later equity financing. If they do, you as a Safe holder may be rolled over with the same terms. Alternatively, the company may choose to convert the Safe investment into preferred stock in the company. Should a liquidity event happen while the Safe term is in effect, you have the choice to get the cash transferred to your bank account or to convert into company stock. The price would depend on the purchase price and fair market value of the shares.
The rules state that you must keep the investment for at least a year. After the first year of holding the investment, you may be able to transfer or sell it. To do so, you will need a market in which to resell it or an accredited investor who is interested in buying the Safe security. You should not purchase one of these securities unless you are comfortable enough with the company and its idea to hold it long term. As with other angel investments, they are not easy to sell or trade.