Do you ever wish you could be a part of a startup and watch it go higher as it turns into a public company? Do you want to cash in on the success and growth of a startup?
Startups are growing across the world and the United States leads the startup culture. However, only founders and employees have a chance to invest in the startup before it turns into a public company, after which, anyone can invest in it.
If you are looking for an opportunity to invest in a Pre IPO startup but do not know how to go about it, you have come to the right place. EquityBee is a great platform that connects investors and employees who are keen on investing in a pre-IPO startup. It is one of the first companies to focus on employee options through crowdfunding. The platform offers benefits to employees and investors.
Stock options are a common form of compensation amongst start-ups today and EquityBee helps employees at the startup get the funds they need to exercise their stock options before their expiry. It helps connect the employees to the investors who can help them with the capital to do so. This will help employees unlock their equity value and will give investors access to an investment opportunity they would not have access to otherwise.
EquityBee acts as a middleman that connects employees and investors through the platform. It allows investors to choose the startup they want to invest in through employee stock options.
What is EquityBee?
Established in 2017, EquityBee is a unique platform and is one of the earliest employee options crowdfunding platforms. It works as a matchmaker between the Investors and Employees. The platform encourages employees to not forgo the rights they have while working for a startup. They allow employees to obtain the funds they need and exercise the options. On the investor side, EquityBee gives a chance to invest in startups by funding the employee’s options that are not on the stock exchange. It helps to level the ground with venture capital.
Who Should Use EquityBee?
Investors can get an opportunity to invest in startups that may have been inaccessible to them. They can choose the opportunities and invest on a deal-by-deal basis. It will give a chance to get in on a start-up and take the piece of the upside. To join the platform as an investor, you must be an accredited investor. You will have to declare that you are an Accredited Investor as per the rules and regulations of the country you live in. Typically, an accredited investor is:
- An individual who earns an annual income over $200,000 (or $300,000 with a spouse) or
- Individuals with a net worth exceeding $1 million alone or with the spouse.
Employees can get what they have earned and not lose on the opportunity to exercise stock options they have worked years to earn. The investor network will reduce the risk and cover the cost of exercising the options and at the time of exit gains, employees can retain a portion.
How Does EquityBee Work?
An option is a contract that allows the holders to buy a share in the company at a specific price. It is a popular form of compensation today. Employees with stock options can cash them in when the company is sold off at a stock price that is higher than the share price established in the option contract. The difference in the amount will be their profit.
When a company grants options to an employee, they will come due with time, over a period of four years. Hence, workers can profit from the exit even if they have only worked with the company for two years.
As long as the workers are associated with the company, they are not under any pressure to exercise their options. Some founders are also extending the period and it goes as high as a decade.
The employees who choose to leave the startup have 90 days to cash in on the options and to convert them into stock or not exercise the option and forego the compensation for an exit. Based on the package, cashing in on options can be costly. It can range anywhere from $5,000 to hundreds of dollars. If the employee does not have enough funds to exercise the option, they can connect with the investors on the platform.
EquityBee works in a simple manner. The employees who require capital to exercise their stock options can share the investment opportunity on the platform anonymously. The investors can browse the available investment opportunities and choose to invest by funding the employees who can exercise their options. At the time of exit, the investors and employees will share the gains.
The process of investing in EquityBee is simple and hassle-free. You can sign up as an investor with your email address and phone number.
At the next step, you need to choose if you are an accredited investor or not. If you are not an accredited investor, you need to state the same and the team will contact you for more details.
Next, EquityBee will ask you about your investing experience. You will have to pick a range that you want to invest in start-ups this year. The minimum is $10,000 and it can go as high as $200K or more. You will have to mention if you have invested in start-ups in the past and state your experience in investing.
There will be a private investment dashboard built based on this information and you are ready to start investing. The dashboard will be updated from time to time.
Types of Investments Offered
EquityBee offers an opportunity to invest in startups through employee stock options. Employees can obtain funding to cash in on their options without taking the risk and investors get a chance to invest in the privately held company. The platform only offers employee stock options to invest in. The transaction is executed through a Simple Option Funding Agreement (SOFA). It is executed with both the parties who agree to share the profit in case of dividends, IPO, or a cash sale.
Pricing and Fees
As an investor, you pay an upfront fee of 5% + VAT to EquityBee whenever you fund the transaction. In case of a profit on the transaction, you also need to pay 5% + VAT. This means you pay an upfront fee to make the transaction and for any gains over and above the original investment amount, you pay another 5% + VAT.
How Much Can You Make When You Invest on EquityBee?
When you invest, you get to be a part of a startup that wouldn’t have been accessible to you otherwise. You will get a part of the stock option and when the company is acquired or has an IPO, you will be able to make the most of the difference and earn profits. At the time of investment, you get a contractual obligation through SOFA.
It is a unique chance to get access to the startup investing world and participate in the potential success of different startups by funding the exercise of employee stock options.
Ways You Can Make Money on EquityBee
There are different ways investors earn a return on their investment. When the company is acquired or goes public, the value of their investment will increase and they will be able to make a profit. Investors can also earn a return when the company starts paying dividends. The risk varies on a deal-to-deal basis and there is no guarantee on the returns.
EquityBee offers an opportunity to lock in a part of the future profits. It is hard to estimate the returns at the time of investment. Investors will only be able to get their money back when the company is acquired, goes public, or starts paying a dividend.
When investing in stock options, investors need to keep the risks in mind and carefully choose to invest in companies that show strong growth potential. However, the investment is high risk. There are several startups that are profitable and have earned massive success over time, investing in such startups can generate strong returns in the future.
How Long Will it Take to Generate a Return?
There are certain things you must keep in mind when you enter into a SOFA. You will receive the money if the company is acquired for cash and that could take a few years. You will also get the money out if the company goes public and that could take some time.
Further, you will get the money if the company starts paying cash dividends but it is uncommon for most startups. In the event of the acquisition of the company in a non-cash transaction, the SOFA will remain active until there is an IPO or a cash acquisition.
The SOFA will be terminated if the company goes out of business. In this case, you will not get the money out.
This is a long-term investment and could stretch anywhere from 5 years to 15 years or more.
Diversification of investment portfolio: You get to invest in a new asset class that you did not have access to earlier. It will help diversify your portfolio and increase the chances of higher returns.
Lower price at entry point: Employees who ask for exercise cost funding have already vested and since options take one year at the minimum to vest, the investment will be made at a price that was set in the past. Hence, you enjoy a lower price at an entry point so if the company is growing, you already have a profit.
User-friendly platform: It is fairly easy to get yourself registered on the platform by answering a few questions. If you need any help, the team will be happy to schedule a call with you.
High-risk investment: An investment in a startup is not a traditional investment and the risk is high. There is no guarantee when you will have your money back and how much profit you can earn. It depends on how well the startup performs and the revenue it generates.
No guarantee of returns: There is no guarantee of returns when investing in EquityBee. The startup may not be acquired for cash or go for a public offering for a long time.
High minimum investment amount: The minimum investment amount in EquityBee is $10,000 and higher.
EquityZen offers similar services to EquityBee but also allows you to invest in individual companies through EquityZen’s investment funds. There is a low minimum investment amount and you can invest in diversified pre-IPO companies. You need to be an accredited investor to participate in the investments. You can reserve the investment in EquityZen’s investment funds by signing a non-binding sheet. The portal also allows you to manage the portfolio and receive the investment proceeds when the company is acquired or has an IPO.
Another opportunity to consider is MicroVentures. It offers services of accredited investing, equity crowdfunding, and secondary trading. You can find the investment opportunities on the website and there is a low minimum investment amount. There is a wide range of investment opportunities with MicroVentures.
Should You Invest in EquityBee?
EquityBee is ideal for investors looking to own a part of startup companies but there is risk associated with the investment. The minimum investment amount is high and there is no guarantee of returns. It is advisable to invest carefully after considering the future growth prospects of the company.
If you want to diversify your portfolio and are looking for a non-traditional form of investment, EquityBee is a great choice. Even if you do not intend to invest right away, you can open an account for free and browse through the available investment opportunities to get an insight into how it works. If you have $10,000 and want to add a startup investment to your portfolio, you should certainly sign up on EquityBee.
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