Investing in early-stage and small private companies can be rewarding, but most of the risk falls on the investor. Read this before you invest in any offering we profile.
You can lose everything
Most startups fail. If a company runs out of money, shareholders typically recover nothing. Only invest money you can afford to lose entirely.
Your money may be locked up for years
Reg CF shares cannot be resold for a year, and there is usually no market for them afterward. Reg A shares often have no market either. Returns, if any, typically come only from an acquisition or listing years later.
Dilution
Companies usually raise again. Each new round can shrink your percentage ownership, and later investors may receive better terms or senior rights.
Valuations are set by the company
In most crowdfunding rounds, the issuer chooses its own valuation. No underwriter or lead investor has negotiated it. Compare it with revenue, profits and similar companies.
Limited information and verification
Disclosure is lighter than for public companies, financial statements may be reviewed rather than audited, and platforms do not verify all issuer claims.
Limited rights
Non-voting shares, SAFEs and convertible notes give investors little or no control. SAFEs and notes may never convert into equity.
Promotional language
Offering pages are marketing. Treat projections, “modeled” margins, letters of intent and memoranda of understanding as possibilities, not results.
Concentration
Spread small amounts across several companies rather than putting a large sum into one.
Fraud
Be wary of guaranteed returns, pressure to invest immediately, or requests to send money outside a registered platform. Check the intermediary on FINRA BrokerCheck and the SEC's funding-portal list.