- Just how risky are startups?
- How can I decrease the risk?
- How many investments should I make?
- Is an equity investment appropriate for me?
- Is a debt investment appropriate for me?
- Can I easily resell my investment?
- Will my percentage ownership be diluted?
- Will the startup use Wefunder in the future?
Very! You should only invest what you can afford to lose. Do not invest so much that it would impact your lifestyle or retirement plans. Every investment listed on Wefunder is much riskier than a public company listed on the stock market. It is entirely possible that you will lose every dollar you invest on Wefunder.
You are more likely to avoid loss by diversifying your investments, focusing on areas in which you have expertise, and investing in startups whose products you passionately use. Even professional investors have a difficult time predicting exactly how startups will earn money in the future (e.g., Google in 1999). Investing in what you know and find personally valuable is an important signal of a good investment.
We recommend making several small investments each year rather than one large one. For instance, if you decide you can safely invest $5,000 per year in startups, it'll be less risky to make ten $500 investments instead of a single $5,000 one. You should never invest more than you can afford to lose.
If you can't afford to lose every dollar you invest on Wefunder, the answer is no. If you can't afford to wait 7+ years for a return, the answer is also no.
You might have a strong belief in the future success of a company, but it's safer to think of an equity investment as a lottery ticket that might pay off in the very long term.
Unlike the stock market, investment outcomes are much more binary (complete failure or wild success), and there's no stock market that'll allow you to easily re-sell your investment stake to someone else unless the company is acquired or prepares for an IPO.
Compared to equity investments, loans can be slightly less risky, but also have a smaller upside. You should still assume that even a loan will not be paid back. Never invest more than you can afford to lose.
It's safest to assume you cannot resell your investment to another investor. First, there is not yet a liquid secondary market like the New York Stock Exchange for private companies. Regulation Crowdfunding also specifically prohibits the resale of securities for one year, except to the issuer, an accredited investor, a family member, or their trust.
Yes. An equity stake will almost certainly be diluted.
Successful startups host many rounds of financings, all the way to an IPO. For each financing, the startup issues additional stock to the new investors. As long as the value of the company increases with each funding round, this is healthy and normal. For example, the first investor in Facebook, Peter Thiel, originally purchased ~10% of the company for $500,000. By 2011, that stake was diluted down to under 3%, but estimated to be worth ~$2 billion.
Sometimes, when things are not going well, the startup is given the option of going bankrupt or raising more money in a "down round," which means the value of the company decreased since the last financing. This is very bad for the founders and past investors alike; the dilution happens much more rapidly. But it's preferable to the startup going bankrupt and the investors losing everything.
Wefunder provides startups free continued access to our platform, but there is no guarantee they will continue using our services.