Startup Investing Guide

The Startup Investing Guide

What is Startup Investing?

Startups are young, early-stage companies that need funding to grow and serve their market. To raise capital, they often offer a share of their ownership—called equity—to investors. These businesses are typically built around innovative ideas and aim to grow quickly in high-potential industries.

Who Invests in Startups?

Historically, startup investing was limited to Venture Capitalists. Today, equity crowdfunding has opened the door for anyone to invest in startups, sometimes with as little as a few thousand dollars. Individual early-stage investors are often called Angel Investors.

Accredited vs. Non-Accredited Investors

In the U.S., investors are classified by the SEC as either accredited or non-accredited:

• Accredited Investors must meet certain wealth or income thresholds (e.g., over $1 million in net worth, excluding their home, or annual income over $200,000).

• Accredited investors often get access to more exclusive investment opportunities.

• Non-U.S. investors may also participate if allowed by local laws and platform rules.

Startup founders ultimately decide which investors they accept.

Ways to Invest in Startups

There are three common forms of startup investment:

1. Equity (Ownership Shares)

Investors buy a percentage of the company, either as common or preferred shares (preferred shares usually offer better protections if the company fails or is sold).

2. Convertible Notes (Debt That Converts to Equity)

A short-term loan to the startup that pays interest and can later be converted into equity, usually at a discounted price during a future funding round.

Example: A startup offers 5–8% interest annually. After two years, you can convert your investment into shares at a 10–30% discount based on the company’s next valuation.

3. SAFE Notes (Simple Agreement for Future Equity)

Similar to convertible notes, but without interest. SAFE notes convert into equity during the next funding round, usually on more favorable terms than convertible notes.

How Do Startup Investors Make Money?

Unlike stocks or bonds, startup investments are illiquid, meaning they can't easily be sold. Investors often wait 2 to 6 years before seeing returns.

Startups increase value through:

• Customer growth

• Revenue generation

• Profitability

• Acquisitions or public listings

Table: Common Exit Opportunities for Investors

Note: Events like acquisitions and IPOs often lead to the highest returns, but can take years.

Minimizing Risk in Startup Investing

Startup investments are high risk—many fail. You may lose your full investment. To reduce risk, follow these best practices:

Diversify Your Portfolio

1. Limit each investment to 2–10% of your total investment portfolio.

2. Invest in startups across different industries.

3. Consider startups from different geographic regions.

4. Only invest money you won’t need for the next 2–6 years.

Evaluate Startups Carefully

5. Look for startups with experienced management teams.

6. Prefer companies with existing customers and revenue.

7. Assess the likelihood of acquisition or IPO.

8. Study the industry’s growth potential, the startup’s competitive edge, and barriers to entry.

9. Research other investors involved—strong backing can be a positive sign.

10. Review legal documents carefully, ideally with help from a lawyer.

◘ Startup Investing Guide

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