Investing is one of the best ways to financially prepare for the future. Making the right investments decisions lets you make major payments early, such as repaying your mortgage or paying off your car. You can also use your investments to help your family, paying off university loans so your children are not saddled with excessive student debt. Investing is also a way to retire early, as well as guarantee you have a flow of income even after you finish work.
While there are many benefits to investing, there are also risks. Choosing the wrong investment, or holding onto your investment for too long, can result in a loss of profits. If you only invest in safe options, you may not make enough money. One of the ways you can maximize your investments and avoid some of the riskier markets is investing in a private company.
Differences Between Private and Public Companies
There are several key differences between investing in a private company over a public one. The biggest difference between the two companies is availability. Any investor can buy shares from a public company, typically by going through a stock exchange. With a private company, you must reach out to the business directly. Some companies will use venture capital firms as middlemen to set up the investment. Unlike with public companies, private investors can set limitations on who invests in the company, such as requiring you to initially invest a minimum amount of money. They may also require you to hold onto your shares for a set period of time before you can sell.
Benefits of Investing in a Private Company
For many investors, the biggest advantage of investing in a private company is getting shares before the company goes public. If the company is successful and opens up stocks to the public, your shares typically experience significant growth. As the company continues to succeed, more investors want to purchase shares. Since you already have your shares, you can comfortably sell your stock for a large profit. Many of the most successful investment stories are the result of getting private shares before a company went public, such as investors who were able to retire from Apple stock.
While you can get the biggest profit by investing early in a private company, it also means you must wait longer for the company to grow. This also carries the risk that, as time goes on, the company experiences hardship. There may also be significant changes to the company, such as the owners deciding to sell the business.
Not all changes are necessarily bad for investors. If a larger business wants to purchase the company, your shares become much more valuable. Private companies are typically more forthcoming with investors as well, so you have a better idea whether there are any changes coming. With public companies, information comes out much slower and there is more speculation. If you want the greatest amount of control over your investment, private companies are your best choice.
Another benefit of infesting in private companies is the ability to get alternate payments. Instead of investing for shares, you can act as a lender. In these circumstances, you provide money upfront, which the company repays at an agreed upon date, with interest. This is more common with smaller businesses or startup companies. Some deals use a hybrid model, where you are only paid back a portion of your initial investment, but receive stocks in the company to cover the rest of your investment.
Disadvantages of Investing in a Private Company
In most cases, it takes a minimum of five years before your investment in a private company pays off. Another disadvantage of investing in private companies is it frequently takes longer to find a company to invest in. Even if you are knowledgeable about a specific company, there is no guarantee the company is currently looking for investors. With some companies, there may also be a negotiation process to finalize the terms of your investment. In comparison, investing in a public company is a straightforward process, with many online brokerages and apps further simplifying the process.
Researching private companies requires more effort than public companies. With public companies, the company is required to disclose information at set intervals to investors. There are also many news articles and other sources of information discussing public companies. With private companies, you are required to do your own research, and the company is not required to provide you updates.
Equity Crowdfunding
Thanks to the internet, it is much easier to find a private company to invest in. Instead of opening to public investors, many new businesses are choosing to remain private, but search for investors on equity crowdfunding sites. For businesses, this allows them to seek out new investors while still retaining control over who they work with. As an investor, it makes searching for potential investments much easier. There is also more information available on equity crowdfunding sites, which helps with initial research.
AngelList
AngelList is one of the original equity crowdfunding sites. All of the businesses are vetted before their advertisements are made public. The website also has options for group investors. In order to invest in a project, you must provide at least $1,000 with your initial investment.
Fundable
Fundable combines elements of both traditional and equity crowdfunding. Companies can provide certain perks or rewards to investors based on how much they donate. It is commonly used by startup businesses and smaller companies. Unlike other equity crowdfunding sites, Fundable does not touch your money. Instead, it gives you a platform to speak with businesses, with the actual investment occurring outside of the website.
Wefunder
Many equity websites are built with rich investors in mind. Wefunder places a greater emphasis on new investors, who do not have as much capital as established investors. Wefunder allows you to make investments as low as $100, while most other sites require at least several thousand dollars. Before you agree to an investment, you can communicate directly with the project leader and privately ask questions.
CircleUp
CircleUp primarily focuses on technology and fitness companies. The most unique draw of CircleUp is how the projects are listed. The website uses a learning algorithm to identify the most promising startups. Investors always have the option to search for investments on their own. CircleUp has options for both sole and group investors.