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”.
How do I invest?
Registering with a platform is straightforward. Most require you to provide your name, email address and a password and that is it to get going - though you’ll need to provide more information before investing so that the platform can comply with local regulations (proof of address is common while another form of identification document may also be required).
*Note, some platforms only allow sophisticated investors or high net worth individuals to invest.
Once registered you’ll be allowed to see the current investment propositions. Spend time doing your due diligence and if you’re unfamiliar with how to do this you can head to our investors academy and learn the ropes or download our guide to investing in startups.
Once you’ve conducted your due diligence and found the opportunity you are interested in, the process is as follows:
What risks will I face?
Not every company can be the next facebook, quite the opposite actually as, dependent on the source, somewhere between 50-80% of startups will fail before their 5th year in operation. This is why many investors create a portfolio of early stage investments
While many companies pitch that they’re looking to exit in 3-5 years the truth is that it will take much longer. Industry dependent, investors should expect a minimum 7 year investment horizon though with hardware companies and pharma it can be 15+. Remember, never invest more than you are prepared to lose and don’t expect a quick return.
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).
Through EIS and SEIS investors receive upfront tax reliefs in addition to further downside reliefs that come into play should the companies invested in fail. Combined these reliefs can cover from 30% to over 75% of an eligible investment.
Not all companies or investors will qualify so be sure you read the rules around it and check if the company has applied for advanced assurance for the relief.
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.
More information on equity crowdfunding
- Top 4 things to look for in an equity crowdfunding platform
- Frequently asked questions
- Why you should invest at the right valuation