Equity crowdfunding, and the ability to invest in early stage companies through an online platform like VentureCrowd, is still regarded as a novelty by many wholesale investors.
That said, first-hand experience from our platform shows that interest is growing at a steady clip. Though, whenever I meet up with potential investors, I’m typically greeted with a barrage of questions, so there’s obviously some confusion out there.
Here are five questions I’m commonly asked, and my answers to them.
1. How do you set a company’s valuation and who sets the investment terms?
External lead investors such as venture capitalists or angel investors independently negotiate the pricing terms with the company looking to raise equity. To list on VentureCrowd, the company must offer our investors the exact same terms.
2. How do companies qualify to list on VentureCrowd?
As a follow-on or “top up” funding vehicle, VentureCrowd requires external professional investor validation of funding rounds. On a practical level, this means only businesses that have secured lead investor finance from traditional capital raisings from angel or venture capitalists, will be considered for our platform.
For companies meeting this requirement, to fulfil our listing criteria, they must also offer VentureCrowd investors the opportunity to invest in the business on the same terms as the lead investors.
As a final pre-requisite, 51% of the equity being sought by the business must already be committed. VentureCrowd’s capital allocation is typically capped at 49% of the equity raise.
3. What do you get when you invest in a company on VentureCrowd?
Generally, when you invest in an equity opportunity listed on our platform, you enter into an investment contract with VentureCrowd. We make the investment on your behalf through our unit trust structure. The documentation for the particular opportunity will fully explain the structure of the investment.
Your ownership level in the Trust depends upon the amount you have invested. VentureCrowd acts as trustee for the unit holders. As a unit holder, you will receive a Certificate of Unit Holding, along with regular investor updates.
4. When do you get returns on your investment, and when can you sell it?
Traditionally with early stage securities, the business angels and venture capitalists investing in startup companies achieve liquidity when the companies in which they invest are acquired or IPO.
Similarly, as an investor on VentureCrowd you won’t be able to withdraw any money invested through a VentureCrowd trust. However, every deal is different and profit expectations are disclosed in the term sheet.