Investing in startups is exciting – and, when done right, can be a very valuable asset to add to your investment portfolio. However, while access to the public market is open to all, investing in startups is generally more limited. Some investors are able to access high growth startups via vehicles like venture capital or private equity funds, but doing so often requires large amounts of capital and niche connections that few investors have.
So, how can accredited investors access startups without these investment mechanisms?
The most common methods are through the secondary market, such as through secondary brokers and trading platforms, or through a forward contract, like Equitybee. A secondary transaction is where one investor sells their shares outright to another investor. Equitybee, on the other hand, gives the investor access by funding employee stock options. You can read more about this process here. Both methods (which have recently emerged) make it easier to access high-growth, VC-backed companies while they still remain private.
How does investing with Equitybee differ from investing in the secondary market? Secondary trading involves purchasing shares outright, while Equitybee facilitates the funding of employee stock options (via a variable prepaid forward contract) rather than purchasing shares. After funding options through Equitybee, you will not own the shares – but instead you will receive a predetermined portion of the share value upon a successful liquidity event. This is the main difference between Equitybee and the secondary market.
There are details to consider when deciding between funding employee stock options and secondary trading. First, when you invest using the secondary market, you run the risk of illiquidity, as a company exit is often required to unlock any investment return. In contrast, when you invest using Equitybee, employee shares may be eligible for tender offers prior to an exit event.
Equitybee’s method offers you additional benefits. Our structure aligns interests among buyer, seller and Equitybee, as each stands to gain from a successful liquidity event. Many of Equitybee’s offers provide access to discounted valuations, as the price per share is largely driven by the option grant dates. When you invest with Equitybee, you have the ability to access high-growth startups at past valuations – on average a 44% discount 409A! [1] Further, company approval is not required as investors are not added to the company’s cap table; therefore, there’s no right of first refusal (ROFR) risk.
Have a startup in mind but you’re still not sure which mechanism is best for your specific investment? Our team developed a comparison tool to help you evaluate your specific scenario and determine which method you prefer.
You input the both sets of investment parameters and our tool will calculate the inflection point at which one method or the other – Equitybee or secondary transaction – is more favorable.
First, you’ll need to gather the investment parameters to input into the calculator, including: investment amounts, interest rates, share incentive percentages (SIP), price per share, and brokerage fees, if applicable. To note, both Equitybee’s brokerage and carry fee are factored into the return calculation, so you only need to enter fees associated with a secondary transaction, if any. Then, you’ll enter your estimate for the time to liquidity and the potential price per share upon liquidity. With this information, the simulator will calculate the implied exit multiple over exercise price and secondary price, in addition to potential returns for both investments, including the inflection point (the share price upon a liquidity event where Eqitybee’s return on investment (ROI) would equal a secondary’s ROI).
Let’s go over an example of the simulator. Let’s say you have $100,000 that you wish to invest in a specific private company. On Equitybee, you see that there is an offer for this company with the following terms: 4% annual interest, 30% SIP, $1.75 effective price per share + Equitybee’s 5% brokerage fee and 5% carried interest. On the secondary market, the current share purchase price is $3 with a brokerage fee of 2%.
If, for example, you think this company will exit in 2 years with a share price, or exit value, of $5.50, which is 1.8x the current share purchase price. Our simulator immediately calculates the returns for both investments and shows- an inflection point of $5.98. So this means if you think the exit value is less than $5.98, then it would be more favorable to invest through Equitybee. If you think the exit value is greater than $5.98 then it would be more favorable to invest through a secondary investment.
Our simulator is quick and comes with a term directory to help you understand the calculations and easily interpret your results. But, if you have any questions on how to correctly use the simulator or evaluate the results, our team is always happy to help!
There are numerous ways that you can access startup companies, though the most accessible investment vehicles are the secondary market and a company like Equitybee.
Here at Equitybee, we want to imbue you with the confidence to make this crucial decision. That’s why we created our comparison tool: you’ll get the information you need to determine the more profitable investment. We hope you’ll take the time to check it out for yourself here. And once you do, feel free to head directly to your Investor Dashboard to get started with Equitybee!
As always, at Equitybee, we’re dedicated to providing our investor network with the unique opportunity to invest in startup companies at the best valuations – but we’ll let the simulator do the convincing on our behalf!
Have more questions about how our comparison tool works? Feel free to schedule a call with an Investor Relations Manager!
[1] Sourced by Equitybee proprietary data.
