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.
How do I invest?
Conduct due diligence
Do your homework, ask questions and select the opportunities you like
Review the terms
Go through the legals and subscription agreement to be happy with what you are investing in
Confirm and invest
Enter your address and payment details to confirm your investment
Your investment is confirmed and held in escrow until the round completes
In order to review the opportunities on SyndicateRoom you must be a registered member.
How can I make a profit?
A report by NESTA showed that investors who backed businesses in industries they knew something about, and who created a portfolio of investments (not putting all their eggs in one basket, so to speak), were more likely to see a return from their investments.
Depending on the situation, an investor can see a return in three ways:
- Trade sale: the company is sold to another company for a lump sum, which is divided proportionally between shareholders
- Public offering: the company is listed on a stock exchange and shareholders can sell their shares at a price determined by public demand
- Dividends: the company sometimes pays a percentage of their yearly profits to shareholders
What tax reliefs are available?
To offset some of the risk involved with investing in early stage companies the UK government offers tax reliefs on some opportunities in the form of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
50% tax relief from the Seed Enterprise Investment Scheme
30% tax relief from the Enterprise Investment Scheme
More about SyndicateRoom
SyndicateRoom offers a unique form of equity crowdfunding: members enjoy investing in opportunities on the same economic terms as the experienced business angels (the professionals when it comes to equity investments) who are leading the investment round.
Research by NESTA indicates that business angels receive a higher than average rate of return on their investments. Unlike VCs and other funds, business angels put their own money into businesses they choose to invest in, and as such they are very careful about their investments. There are a number of reasons why this can benefit the crowd.
Detailed due diligence
Before investing in the deals themselves the business angels leading a round will conduct their own due diligence, aiming to poke holes in the plan and making sure the entrepreneurs are capable of delivering it. Only if they are satisfied will they invest and only if there is a lead investor will SyndicateRoom consider listing a company on the platform.
Negotiating the valuation
Further, before an opportunity is opened to the SyndicateRoom network the valuation has been scrutinized and negotiated by the lead investors. Investing at a fair valuation is crucial to making a good return.
Business angels offer constructive comments to the company’s directors based on their experience, and will generally have a network of useful contacts at their disposal - all very helpful in aiding the company to grow.