Disclosures

  • SeedInvest’s due diligence process is no guarantee of success or future results. All investors should carefully review each investment opportunity and cancel their subscription within the allotted time-frame if they do not feel comfortable making any specific investment based on their own DD. Learn more about due diligence on the SeedInvest Blog (https://www.seedinvest.com/blog/angel-investing/how-to-assess-an-investment) and our vetting process in our FAQs (https://intercom.help/seedinvest/en/).

  • SeedInvest’s selection criteria does not suggest higher quality investment opportunities nor does it imply that investors will generate positive returns in investment opportunities on SeedInvest. Learn more about due diligence on the SeedInvest Blog (https://www.seedinvest.com/blog/angel-investing/how-to-assess-an-investment) and our vetting process in our FAQs (https://intercom.help/seedinvest/en/).

  • Diversification is only across multiple early-stage investment opportunities within the asset class. There is no guarantee that this program will lead to a well-balanced portfolio of companies across industry types or stages across the asset class. In addition, enrolling in this program will not lead to diversification across your entire investment portfolio. In order to achieve diversification, we do not recommend you allocate more than 10% of your entire investment portfolio to alternative assets.

  • Testimonials may not be representative of the experience of others and are no guarantee of future performance or success. No individuals were compensated in exchange for their testimonials.

The Problem with Common Stock

Early-stage investors should never purchase common stock
 

One of the most critical – yet often overlooked – considerations for investors in private companies is where one falls within the overall “capital stack”. At its core, the capital stack is an overview of who has either invested in the company or lent the company money. This helps define which investors and/or lenders get paid back, in what order, and over what period of time. Put another way, the capital stack helps define which stakeholders have a preference over others.

When it comes to investing in private, early-stage companies, the order usually goes as follows:

  1. Debt Holders
    This is relatively uncommon for companies seeking their first few rounds of funding since they typically don’t have the assets or track record required by traditional debt providers and are therefore viewed as too risky.
  2. Convertible Note Holders
    Convertible notes represent a form of short- to medium-term debt that is designed to convert into equity. You can learn more about convertible notes here.
  3. Preferred Stock
    Venture capitalists and angel investors purchase preferred stock in part to ensure they are repaid ahead of common stock holders.
  4. Common Stock
    This class of stock is typically held by the company’s founders and employees.

SeedInvest will not allow fundraising companies to sell common stock to investors in our network. And while there are many reasons for this, two of the primary issues are that:

  1. Holders of common stock are paid out last in the case of a liquidation event like a sale of the company.
  2. Common stock does not include a liquidation preference, which helps protect investors in the case the company falls short of expectations.

While an in-depth discussion is outside the scope of this post, common stock lacks numerous rights, preferences, and protections early-stage investors should both expect and demand given the level of risk they are assuming. Regardless of what you may hear from a fundraising company or platform, there is virtually no instance in which an early-stage investor should feel comfortable or protected when purchasing common stock.

 

This post was written by aaronkellner on January 17, 2018

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