Investing in private, pre-IPO (initial public offering) companies is an exciting opportunity now available to nearly all investors. But unlike investing in companies that are listed on the public markets, to invest in private companies, you often need to create an account with an equity crowdfunding platform.
Today, I’ll provide you tools you need to start investing in private companies.
As InvestorPlace’s resident private investing expert, Cody Shirk, shares with us often, investing in private companies is one of the best ways to build lasting generational wealth for you and your family.
Cody says: "Generating large sums of wealth from private companies makes complete sense. Private companies often have leaner teams and less scrutiny, and they allow owners/investors in the company to be closer to the profits."
But that’s not all: "Early founders and investors in private companies own amounts of equity that exponentially increase in value over time. As a company grows in value, early equity holders experience dramatic increases in their own personal wealth."
So how can you grab your share? Let’s get some of your most pressing questions answered…
Can Anyone Invest in a Startup?
The short answer… YES! Anyone can invest in private startup companies.
But that wasn’t always the case.
Before April 5, 2012, when a landmark piece of legislation called the JOBS Act became law, investing in private companies was limited to accredited investors. (An accredited investor is someone who hits strict income and net worth requirements. Think the ultrarich.)
The JOBS Act changed all that.
Under these new rules, and a recent change from the U.S. Securities Exchange Commission (SEC), startups are now allowed to raise up to $5 million from nonaccredited investors.
This is huge!
Now, anyone can grab a share of these tremendous profit opportunities – before they hit the public market!
The best part is that it’s really easy to get started thanks to a number of equity crowdfunding platforms.
Is It Smart to Invest in Startups?
As with any kind of investing, investing in private startups carries risk. But with a smart risk-management strategy in place, you can make big gains from these exciting companies.
That being said, private investing does have some key differences that are important to be aware of…
Private markets aren’t liquid like the public markets.
You can’t sell a private stake in a company the same way you can sell a stock. The money you invest will be locked up for at least a year… sometimes longer.
In the private markets, investors make money when a “trigger” or liquidity event occurs.
This could be the company going public via an IPO or getting acquired. You could receive shares of the company or a cash equivalent of your stake in the company.
The return depends on how much you invested, the valuation of the company at the trigger event, and the terms outlined in the deal.
It can often take years for one of these events to occur.
To make money as a private investor, you should anticipate holding through the trigger event.
So it’s important you only invest with disposable income – money you don’t need to pay the bills.
Most Popular Equity Crowdfunding Platforms
Unlike stocks, you can’t just go to your online broker and place a trade. You’ll have to visit the crowdfunding platform the private startup is using and register yourself just like you would any e-commerce site.
Just like opening a new bank or brokerage account, the crowdfunding site will ask you for some basic information (name, address, date of birth, etc.), you’ll create a username and password, and you’ll give them the necessary banking information to fund the account. While funding can take anywhere from a few minutes to a few days (depending on the site), the process of setting up an account shouldn’t take you longer than 10 to 15 minutes.
Here are some of the most popular equity crowdfunding platforms out there right now:
When a company is raising funds, it will often list on one of the platforms available. If you are interested in investing, you’ll just need to set up an account to get started. Remember, it shouldn’t take longer than 15 minutes.
In the upcoming Union Budget for FY' 22-23, Indian government is set to make big announcements for various sectors, including health, infrastructure, real estate, defence, hospitality and MSMEs(Micro, Small and Medium Enterprises).
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