How do I earn a return?
The amount you may earn depends on the type of investment contract the company is offering.
There are four classes on Wefunder:
- Debt. Some local businesses offer a simple loan or revenue share. A simple loan, just like your car loan, has a fixed repayment schedule known in advance. Unlike a loan, a revenue share returns a fixed amount of money (such as 2X your investment), but the time it takes to repay depends on how well the business does. The faster the business grows revenue, the faster you earn a return, and the higher your effective interest rate.
- Convertibles. Most early-stage technology startups use a Convertible Note or Simple Agreement for Future Equity. These will convert your investment to stock at a later date if the company raises a "priced round" from major investors, most often venture capitalists. At this point, you are a shareholder owning equity, and you earn a return if the value of that stock goes up over time, and you are able to sell it.
- Stock, No Dividends. When a startup is at a stage where they can afford to pay lawyers tens of thousands of dollars, they will do a "priced round". Like the stock market, you are buying equity at a fixed price per share (or unit for LLC's). If the company is successful, the value of the stock can increase with each subsequent round of financing, until the company is acquired or goes public. Then you earn a return.
- Stock, Dividends. While a tech startup almost never offers dividends, a later-stage local business - such as a brewery opening a second location - often will. The type of dividend can vary. Some might offer a fixed dividend per share per year. Some might offer a percentage of profits. A common scenario is also to "swap" the dividend after your investment is repaid. For instance, a brewery might share 80% of its profits until the investors are repaid, and then 20% thereafter in perpetuity.