How Do I Actually Make Money From Private Company Shares?

Let’s be frank, this is what most of you are probably thinking when you invest (or don’t) in one of the Equitise offers. In fact, we know so, that’s what you keep telling us in our post-raise surveys.

There is definitely uncertainty when it comes to making money from companies not yet listed on the stock exchange, there's uncertainty with many listed companies. Which is one of the reasons this new way to invest was only recently opened up to everyday Australians despite being legal in other countries for years. There is risk involved as currently the investment is ‘illiquid’ (meaning you can't sell your shares as there is no exit opportunity just yet). High School economics teaches us that with greater risk, comes greater returns, generally. It’s the same principle here. Early-stage investing is usually seen to be riskier than investing in more established businesses as there is a lot more unknowns. However with greater risk comes the potential for greater returns which is why we advise four things: 

  1. Only invest what you can afford to loose
  2. If you can, invest in early-stage investments as a way to diversify your portfolio, evening out the risk, but also maybe the return, by investing in more established businesses as well     
  3. Do your research. We do ours, but it’s still important you understand the business you are looking at investing in, which is why there is a comprehensive offer document 
  4. Be prepared to be in for at least the slightly-longer term. These investments are not yet liquid and it can take several years before you might realise a return. Read on for how that might happen

So how do you actually make money off these investments?

There are a range of different ways investors can potentially earn a return on their investments. Here’s a quick breakdown of the options:

  1. IPO: An initial public offering, or float, is one of the more common and better known exit opportunities. Generally once a company reaches a certain size, they may wish to raise a larger amount of capital, and provide their shareholders with a way to exit their investment. In Australia this usually takes place through the ASX. The company offers a new set of shares to investors, and in doing so also becomes a public listed company on the stock exchange. This means that existing shareholders and interested parties can buy and sell their shares relatively easily, for a market determined share price. But not all private companies want to go public, so what are the other options?
  2. M&A: We’re sure you’ve seen this combo of letters before but what does it actually mean for you and your bank account? M&A stands for mergers and acquisitions, representing the range of business transactions that can occur between business entities, both private and public. A merger is where two businesses combine into a single entity, often so they can benefit from greater scale and work together. An acquisition is where another entity purchases a majority stake in the company and takes control. When this occurs, the impact on you can vary slightly depending on your shareholder agreement, but generally you will have an option to sell your shares in the transaction, and usually this is a good thing, as the company making the acquisition will have to pay a premium on the share price to complete its transaction. 
  3. Share Buyback: A company might back itself to such an extent that it wants a greater degree of exposure to its own growth. In this scenario, management would facilitate an offer to purchase shares from existing shareholders at a determined price level. This provides investors that choose to take the deal an opportunity to exit their investment. 
  4. Dividends: Distributions of company profits aren’t only limited to public listed companies. If a private company is profitable it may elect to return a proportion of these profits to its shareholders on a regular basis. Shareholders still maintain their holding of the company and receive dividend payments reflecting their share of company profit. Generally this happens later in a company’s lifecycle where it no longer needs to reinvest all profits into growth.
  5. Private Secondary Market: The ASX is an example of a public secondary market where existing shares can be traded between buyers and sellers. Private secondary markets allow private company shareholders to exchange shares between one another should they elect to exit their investment, or desire to increase their holding. 
  6. Off Market Transfer: Similar to a private secondary market but in a more manual sense, if two individuals decided to make an exchange of a shareholding and cash, they can do this privately in accordance with their relevant shareholder agreement.

But enough with all the doom and gloom, here’s why you might want to get involved in an early-stage business: 

  1. Return on investment might be greater as you’re getting in on the ground floor when share prices are low. Imagine investing in a company like Apple or Google right from the get go (sure beats 2% p.a. on a standard savings account!)
  2. Investment is accessible starting from as little as $100, which is a nice break from other investment opportunities at the moment and allows you to diversify (invest in many) 
  3. It’s also exciting being giving the opportunity to become a co-owner in a business you’re passionate about. So far all of our companies have chosen equity crowdfunding because they want ‘the crowd’ around them, drawing on those shareholders for advice and feedback on new products etc 
  4. Private company investment is a great way to diversify your portfolio. We’ll write a more detailed blog on this soon, but it can provide protection from market forces that might impact on public shares, and this super low interest rate environment we’re currently in
  5. Support something important! A lot of the companies we work with are doing genuinely amazing things for the world whether they’re helping to save the environment or providing opportunities to those in need. You might not make a difference with a Telstra investment but you can put your money towards a positive outcome with some of our clients

Given the nature of the companies we raise for and how young the industry is, we’re not surprised there has yet to be an exit opportunity in Australian CSF. We’re very excited at this prospect and expect some exits to start popping up soon. What we have seen is a lot of success so far from the companies we’ve raised for. Quite a few have posted ‘uprounds’ reflecting the goals it’s been kicking, with an average share price increase of 109%! Check out our post on this here

We’re placing a bigger focus on our educational resources this year, so keep your eyes peeled for more content like this. If there’s anything in particular you’re curious about, drop me a line at nicolasc@equitise.com

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