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.
SyndicateRoom offers a unique form of equity crowdfunding: members invest alongside experienced business angels (the professionals when it comes to equity investments) who negotiate the economic terms for the funding round and invest a significant amount of their own capital – but more on that later.
Risk Warning: Investing in early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. SyndicateRoom is targeted exclusively at sophisticated investors who understand these risks and make their own investment decisions. Please click here to read the full risk warning.
Who makes up the crowd?
It used to be that only individuals called venture capitalists, or wealthy business angels (think the dragons on BBC’s Dragon’s Den), would buy shares in early-stage ventures.
Equity crowdfunding sites have helped democratise investment into early-stage companies by opening the door to a larger pool of potential investors, more specifically to individuals the Financial Conduct Authority (FCA) terms ‘sophisticated investors’ and/or ‘high-net-worth individuals’.
In the UK a sophisticated investor must be at least one of the following:
- A member of a network or syndicate of business angels and must have been one for at least six months
- Someone who has made more than one investment in an unlisted company in the past two years
- Someone who is working, or has worked, in the past two years in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises
- Someone who has been in the last two years, or is currently, a director of a company with an annual turnover of at least £1m
In the UK a high-net-worth individual must have at least one of the following:
How can an individual make a return on their investment?
Before going into how investors can make money through equity crowd funding it is important to note that most start-up companies fail, and when this happens a company is unlikely to be able to pay back its investors (wholly or partially), let alone offer them any kind of profit on their investment. One should never invest more than they are prepared to lose.
A report by NESTA showed that business angels who invested in 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.
It generally takes between three and seven years for a company to find out whether a company will sink or swim, although failures usually happen earlier than successes. There are three main ways that an investor can see a return on their investment:
- Dividends: the company sometimes pays a percentage of their yearly profits to shareholders
- Trade sale: the company is sold to another company for a lump sum, which is divided proportionally between shareholders
- Public offering: the company is so successful that it is listed on a stock exchange and shareholders can sell their shares at a price determined by public demand
Who holds the shares?
Some equity crowdfunding platforms, like SyndicateRoom, will arrange for your shares to be held under a ‘nominee structure’. Other platforms operate a direct shareholding model.
Be sure you read the fine print for any investment as some platforms offer investors different classes of share depending on how much they invest. Different share classes can often have different voting rights, as well as different payouts should the company succeed or fail.
Are tax reliefs available through equity crowdfunding?
The government has received a number of plaudits for these schemes, which provide tax relief covering from 30% to over 75% of an investment into an eligible company. Regarding eligibility, investors should check that a company has received an advanced assurance from HMRC to offer SEIS or EIS relief, as this indicates that the company meets HMRC's criteria to do so.
Why would you want to invest alongside business angels?
Research by the organisation 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
Business angels are generally wealthy individuals, able to invest considerable amounts into early stage companies because they have been successful businessmen and women themselves. As such, they have the experience necessary to research a company in depth, and may take months doing so.
The crowd tend to be mindful of the type of product or service they invest in, and the size of its potential market, but are less likely to look into the strength of the team behind the business, to know how to scrutinise a company’s records or to be able to analyse broader considerations, such as the company’s competition.
Having a successful business angel as an investor is good for the company because the angel can offer constructive comments to the company's directors based on their experience, and will generally also have a network of useful contacts at their disposal - all very helpful in aiding the company to grow.
Negotiating the valuation
Who wouldn’t want to price their own company highly? Entrepreneurs are more likely to over-price than under-price their offering.
Crowd investors have little to no chance of negotiating the pre-money valuation they invest at through equity crowd funding platforms. However, business angels always negotiate a decent valuation before investing their own money.
Investing at the right value is crucial to making a good return. Read more about why you should invest at the right valuation here.
To begin receiving full details of each of our investment opportunities and to enjoy all the other benefits of SyndicateRoom membership, join for free today.
More information on equity crowdfunding
- Top 4 things to look for in an equity crowdfunding platform
- Equity crowdfunding a la Warren Buffet
- Frequently asked questions