Home > How Do Startup Investors Make Money?

How Do Startup Investors Make Money?

The world of startup investing is one sometimes touted as glamorous and lucrative for investors, but how do the investors in this market actually make money?

Just like the public markets, startup investors make money by selling their shares in a company at a higher share price than they paid for them. Unlike the public markets, there aren’t as many opportunities to frequently trade shares in private companies and startups.  

There are, however, a number of ways for startup investors to realise returns on their investments;

Investing in startups is a long term investment, and many of the events outlined above can take many years to occur, even for the most successful startups.

Every business that raises on Seedrs is different, but investors should expect to wait anywhere between 2 and 15 years from initial investment to exit, and in many cases, we have seen this timeline extending. What is clear is that businesses are remaining private for longer, which is making products that provide investors access to liquidity important more than ever. Fortunately, we’re building to solve this problem with the Seedrs Secondary Market, and you can learn more about how this can help you realise a return sooner, in the next section. 

A reminder of the risks of startup investing

This guide explains the different methods for investors to make money from their startup investments. However, as is the nature of startups, the majority of businesses will fail before they have the chance to exit, and investors will lose all the money that they invested. 

You can read more about the risks of startup investing in our guide ‘What Are The Risks Of Investing In Startups?’

What Does It Mean When A Startup Exits?

‘Exit’ is the term used when private investors sell all of their shares, exiting their investment in a business. A startup ‘exit’ comes in a few forms: the company has been sold, merged with another company, or gone public through an initial public offering (IPO). In other words, the startup has reached the end of its lifecycle as an independent company and has transitioned to a new phase.

Acquisition 

A share acquisition is the most common form of exit for a startup. This is when another company buys all of the founders and investors’ shares in a startup. For the startup, it can mean a significant payout for the founders and investors.

Merger 

Another type of exit is a merger, where two companies combine to form a new entity. This can happen when two startups join forces or when a startup merges with another company.

IPO – Initial Public Offering

Finally, an IPO is when a company goes public and offers shares of stock for sale to the public. This can be a significant milestone for a startup, as it allows the business to raise lots of new capital and continue on its journey, whilst providing a payout for early investors, employees and founders. 

Overall, when a startup exits, it means that the company has achieved its goals or has reached the end of its lifecycle as an independent entity. While it can be a bittersweet moment for the founders and employees, it can also be an exciting new chapter in the company’s story.

What Happens When A Startup Is Acquired?

An acquisition is the most common form of exit for a startup. This is when another company buys the startup, often for a large sum of money. For the startup, it can mean a significant payout for the founders and investors.

Every acquisition is different – the acquisition could be a strategic move for the acquirer to gain access to the startup’s technology, talent, or user base. Some deals will result in the acquired company continuing as it was before, just with new owners, others will result in total integration and the disposal of previous brands.

Startups can be acquired by large public companies, like Google or Amazon, or by private companies, like when Republic acquired Seedrs.

Not all acquisitions are purely cash transactions. Terms are different for every transaction, and many include a mix of cash and equity in the acquirer’s business. 

What Happens When A Business On Seedrs Is Acquired?

When a business that has raised on Seedrs before is acquired, the company will notify investors on its post-investment page, accessible from your Portfolio. Whenever a business posts an update on their post-investment page, investors will receive an automated email notifying them of the new update. To ensure you receive all notifications you can adjust your settings here. 

Typically investors will only be informed once the transaction has been agreed as these processes are highly confidential. Sometimes, there will be a delay from the deal being announced to the transaction completing and money changing hands as some transactions are subject to satisfaction of certain conditions (i.e., regulatory approvals, third parties consents, etc.). For example, when Republic acquired Seedrs, the transaction was announced in late 2021 and completed in 2022, as the Financial Conduct Authority needed to approve the deal.

Once a deal has been agreed and the transaction completed, any cash distributions due to investors will be delivered directly into their Seedrs investment accounts, from which they can be reinvested into other opportunities or withdrawn from the platform. In some situations, part of the consideration is withheld for a certain period of time to cover for the buyer’s potential warranty and indemnification claims against the sellers. In share for share transactions, where part of or all of the consideration distributed to investors is shares in another business rather than cash, Seedrs will continue to hold these new shares on behalf of investors as a nominee. Private shares will appear in your Seedrs portfolio, public shares will be transferred to a nominated broker.

What Happens When A Startup Is Listed On A Public Market?

A startup can list on the public markets via an IPO or direct listing.

An IPO involves new shares being created, underwritten and sold to the public for the first time. This is a big step for a company, allowing it to raise large amounts of capital from public investors, giving it more room to expand. 

In a direct listing, no new shares are created or underwritten, and existing private company shares are offered to the public to raise new capital. This eliminates many intermediaries in the IPO process, and therefore reduces the cost of capital to the business. 

Both IPO and direct listings result in the startup’s shares being traded on public markets by public investors, and allow early private investors to exit.

What Happens When A Business On Seedrs Goes Public?

When a business that has raised on Seedrs goes public, the company will notify investors of the process on its post-investment page, accessible from your Portfolio. Whenever a business posts an update on their post-investment page, investors will receive an automated email notifying them of the new update. To ensure you receive all notifications you can adjust your settings here. 

‘Going public’ is, naturally, a more public process. The business will have its financials carefully audited before publicly filing a registration statement with the Financial Conduct Authority (FCA) in the UK or Securities and Exchange Commission (SEC) in the U.S. When this statement is filed, the founders will update investors on the post-investment page.

Once the business has had its application approved by the stock exchange they want to list on, the process of selling the public shares begins. Typically the company will hire an investment bank to help set the valuation, number of shares and listing price. The bank then underwrites said shares, and completes a roadshow to sell the shares to public market investors.

On the day of public listing, there will typically be an announcement, press coverage, and the shares will be available for trading on a public stock exchange for the first time.

For Seedrs investors, each public listing will be different, and the exact arrangement will always be communicated by our team in the post-investment forum. However, there are a few likely scenarios:

  • All private shareholders are bought out: if this happens, investors will receive distributions in the same way they would for an acquisition. The shares that investors paid £X for whilst private have been sold for £Y, so the investor will receive £Y per share, minus Seedrs’ fees and any other fees generated
  • Private shares are converted to public shares: when this happens, shares will be transferred to a public market broker, with Seedrs as the official shareholder and beneficial ownership given to the underlying investors. Investors will be informed which broker holds the shares through the post-investment page. In this kind of transaction, often the shares will be subject to a ‘lock-up period’. This is a fixed period of time after public listing in which the shares cannot be sold.

What Is A Secondary Share Sale?

A secondary share is the sale by an existing shareholder of all or a portion of their shares to another investor, which is not in connection with a full acquisition or change of control of the company. Secondary sales are typically offered to existing shareholders concurrently with a new financing round, where the new investor will offer to purchase shares at a share price which is usually lower than the round share price. Early investors can then decide to access liquidity ahead of a full exit event, like an IPO or acquisition.

How Can Seedrs Investors Make Money From Secondary Share Sales?

When a company raises new funding, the new investor may offer to purchase existing investors’ shares at the round share price (or at a discount). If this happens to a business that has raised on Seedrs, investors will be offered the chance to sell their shares at the agreed price. Investors will have the choice to sell and see a return on their investment, or hold their shares until a full exit event. 

Selling Shares On the Seedrs Secondary Market

What Is The Seedrs Secondary Market?

The Seedrs Secondary Market allows buyers and sellers to trade their shares in private companies. The market lets early investors in startups and other private companies to potentially realise liquidity before a formal exit opportunity, and is the most active private secondary market in Europe.

You can learn more about the Seedrs Secondary Market in our guide ‘How To Buy And Sell Shares On The Secondary Market’.

What Is A Dividend Paid By A Startup?

A dividend paid by a startup is the same as a dividend paid by any other company. When a business starts to generate profits it can choose to reinvest those profits into the business to fuel further growth, or to pay a dividend to shareholders to provide a return on investment to investors without those investors needing to sell shares. Dividends are paid out as a certain value per share owned, so your dividend will scale as your total ownership scales.

Dividends are more typically paid by established companies, with stable profits and less aggressive growth ambitions. Startups often seek funding from investors to grow quickly to take market share before focusing on profits later, so dividends are not typically a priority, especially in the early years.

What Happens When A Business On Seedrs Pays A Dividend?

When a business on Seedrs decides to pay a dividend, this will be communicated with investors in the post-investment page. The founders of the business will communicate what the payment per share will be, and this will be distributed to investors’ Seedrs Investment Account. The funds can then be re-invested into other opportunities on Seedrs, or withdrawn.

However, There Are Always Risks Of Investing In Startups 

While this section has explored the different ways in which investors can make money from backing early stage startups it is important to understand that all investments carry varying degrees of risk, and investing in early-stage and growth-focused businesses is particularly risky. 

The main risk associated with investing in startups is that the business may simply fail, and investors won’t get their money back. Due to the potential for losses, the FCA classifies this asset class as high risk. You can read more about the risks of investing in startups in our guide ‘What Are The Risks Of Investing In Startups?’.

Back to top