What is equity crowdfunding?
Equity crowdfunding is the process whereby people (i.e. the ‘crowd’) invest in an early-stage unlisted company (a company that is not listed on a stock market) in exchange for shares in that company. A shareholder has partial ownership of a company and stands to profit should the company do well. The opposite is also true, so if the company fails investors can lose some, or all, of their investment.
Previously only wealthy individuals, venture capitalists and business angels, could invest in startups. Equity crowdfunding platforms have helped democratise the investment process by opening the door to a larger pool of potential investors dubbed “the crowd”. Watch an introduction to equity crowdfunding in the video below.
Available tax reliefs
To offset some of the risk involved with investing in early-stage companies, the UK government offers tax reliefs on eligible opportunities in the form of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). These are some of the most generous tax incentives in the world, offering 30% and 50% income tax relief respectively.
Who can invest?
That depends on the platform. Equity crowdfunding tends to take place online via equity investment platforms, which can offer individual investment opportunities as well as EIS investment funds. The criteria for investment varies from platform to platform, so make sure to do your research before you invest.
While some platforms require very few checks to register as an investor, others are more stringent in their guidelines. For instance, SyndicateRoom requires you to self-certify as a high-net-worth individual or sophisticated investor before you can invest via the platform. Self-certification is your way of telling us that you have the experience, risk awareness and means to invest in early-stage businesses.
Want to invest in startups?
If you're completely new to early-stage investing but would like to know more, our free guide to investing in startups might help you get going.
Where can I invest?
You can handpick opportunities to invest in using online equity investment platforms (such as SyndicateRoom). Here are a few of the benefits of investing with us:
- You keep all the tax and other benefits of the EIS
- Our investment network is free to join
- Handpick the businesses you invest in or let our passive EIS fund do the legwork for you
- Invest on the same terms as the Business Angels and VCs leading the round
- We’re sector agnostic, making it easy to diversify your portfolio
The vast majority of funding rounds listing on SyndicateRoom are eligible for EIS tax relief. As a rule, we require the same (or better) level of EIS tax relief as received by the investors leading the round.
Looking for a simple way to build a portfolio of exciting startups? EIS funds do the legwork of choosing investments for you, while allowing you to benefit from the tax reliefs. Different funds have different focuses, so it’s up to you to decide which best fit your investment goals.
As the UK’s first and only passive EIS fund, Fund Twenty8’s focus is on diversification. By using a specialised algorithm, the fund follows the investment decisions of some of the country’s savviest private investors to automatically build you a portfolio of no fewer than 28 EIS-qualifying businesses across different sectors.
Our Growth Fund complements Fund Twenty8 by targeting six or more later-stage companies from SyndicateRoom’s portfolio. Since we’ve worked with these businesses in the past, we are able to draw on our established relationships to cherrypick which businesses to back. Additionally, as we do not want to miss out on any external rounds we think are outstanding, we do reserve the right to invest outside of SyndicateRoom alumni.
What are the risks?
Equity crowdfunding for startups is risky by nature, so there are a number of things you need to be aware of if you're considering investing.
It can take years to see a return
It may take a long time for your shares to increase in value, which in turn impacts on your ability to make a return if you sell them on.
You're unlikely to receive dividends
Startups normally don't make enough profit to be able to pay dividends to their investors, meaning that you're unlikely to see any return or profit until you are able to sell your shares, which can take years if it happens at all.
Any equity crowdfunding investment you make will be highly illiquid as there's no secondary market where you can easily sell on your shares. This means you will most likely have to hold on to your shares until the company you invested in exits or floats on an exchange.
Risk of dilution
If the company you invested in raising more capital at a later date (and it's almost certain that it will), new shares will be issued to the new investors and so your percentage shareholding within the company will be reduced (or 'diluted'). These new shares might also come with certain preferential rights that might work to your disadvantage if exercised.
You can guard against dilution by making sure certain investor protections are in place before you invest.
What are my rights?
There are four terms or ‘investor protections’ that we ensure are always present in the legal documentation for SyndicateRoom deals: pre-emption rights on the issue of new shares, drag-along and tag-along rights, and pro-rata voting rights – regardless of the size of your investment.
Pre-emption rights give an investor the opportunity to ‘follow their money’ as and when a company raises further funding in the future. They give an investor the chance to invest before new investors to maintain their percentage shareholding in the company.
It is worth noting that it is common for a company to have provisions in its legal documents to waive pre-emption rights in certain circumstances and to accept new investors onto a funding round before, or without, allowing existing investors the right to maintain their shareholding. As such, it is important to check what percentage of the shareholder/investor vote is required, or in what circumstances the company can waive the pre-emption rights.