Investing in early-stage and other growth-focussed businesses can be very rewarding, but it involves a number of risks and challenges. If you choose to invest in businesses displayed on Seedrs, you need to be aware of and accept five important considerations:
1. Loss of Capital
Most early-stage businesses and many other growth-focussed businesses fail, and if you invest in a business displayed on the platform, it is significantly more likely that you will lose all of your invested capital than you will see any return of capital or a profit. You should not invest more money in the types of businesses displayed on the platform than you can afford to lose without altering your standard of living.
Almost all investments you make in businesses displayed on the platform will be highly illiquid. It is very unlikely that there will be a liquid secondary market for the shares of the business. This means you should assume that you will be unlikely to be able to sell your shares until and unless the business floats on a stock exchange or is bought by another company; and, even if the business is bought by another company or floats, your investment may continue to be illiquid. Even for a successful business, a flotation or purchase is unlikely to occur for a number of years from the time you make your investment. For businesses for which secondary market opportunities are available (including any available on the platform), it can be difficult to find a buyer or seller, and investors should not assume that an early exit will be available just because a secondary market exists.
3. Rarity of Dividends
Businesses of the type displayed on the platform rarely pay dividends. This means that if you invest in a business through the platform, even if it is successful you are unlikely to see any return of capital or profit until you are able to sell your shares. Even for a successful business, this is unlikely to occur for a number of years from the time you make your investment.
Any investment you make in a business displayed on the platform is likely to be subject to dilution. This means that if the business raises additional capital at a later date, it will issue new shares to the new investors, and the percentage of the business that you own will decline. These new shares may also have certain preferential rights to dividends, sale proceeds and other matters, and the exercise of these rights may work to your disadvantage. Your investment may also be subject to dilution as a result of the grant of options (or similar rights to acquire shares) to employees of, service providers to or certain other contacts of, the business.
If you choose to invest in businesses of the type displayed on the platform, such investments should only be made as part of a well-diversified portfolio. This means that you should invest only a relatively small portion of your investable capital in such businesses, and the majority of your investable capital should be invested in safer, more liquid assets. It also means that you should spread your investment between multiple businesses rather than investing a larger amount in just a few.
Important information about cohort and convertible campaigns
The platform generally provides opportunities to invest in startup and growth-focussed businesses by way of three types of campaigns: equity, cohort and convertible. Information about these campaigns is available here. All the risk warnings above apply to each of the three types of campaigns but you should also be aware of the following in respect of cohorts and convertibles. As each cohort and convertible campaign is different, please ensure you read the campaign text and accompanying documentation carefully.
Cohort campaigns allow you to invest in multiple companies that are selected by predetermined criteria, and are often set up by a campaign organiser (who may run an accelerator, for example). Whilst each investment in a company will be structurally the same as a regular equity campaign, your money will be invested company-by-company over a longer period, meaning that your shares in each company will be issued at different times.
Convertible campaigns allow you to invest in a business in return for a contractual right for shares to be issued on the occurrence of a trigger event (generally another round of funding or a longstop date). In return for investing early, you will receive a discount on the price of the shares issued, and sometimes the benefit of a valuation cap. Whilst the investment in the company will be structurally the same as a regular equity campaign, your shares will be issued later than your money is invested.
Future Fund Convertibles
Future Fund convertible campaigns allow you to invest in businesses that are intending to apply to the Government backed Future Fund. Investment in these campaigns must be on the convertible loan terms prescribed by the Government and you should be aware that these terms differ to our normal convertible campaigns. The convertible loan agreement prescribed by the Future Fund is equity focused and favours conversion of your investment into equity in the business as the default position. However, there are certain events where your investment does not convert into equity and instead may be repaid by the company, with a redemption premium. Before investing, you must read and accept the key terms of the campaign. In addition to the above, you also need to be aware and accept the following risks:
- There is no guarantee that the business will be successful in its application to receive the Future Fund matched funding. The campaign will specify whether your investment into the business is conditional on a successful application of the Government’s matched funding.
- Any interest due will be paid at a fixed rate rather than by reference to an underlying index. Accordingly you should note that a rise in interest rates may adversely affect the relative returns that the convertible loan offers. Inflation may reduce the real value of any returns over time.
- The business may not have sufficient funds to repay the loan on maturity, pay interest when it becomes due or pay the redemption premium included in the terms. It is likely that you will lose all of your invested capital and you should not invest more money than you can afford to lose without altering your standard of living.
- Convertible loans are unsecured obligations and in the event that the business fails, your investment will be ranked behind secured creditors of the business. This means that if the business fails, it is unlikely that you will have your initial investment or outstanding interest payments returned to you because there is no security over any remaining assets.
- The convertible loan agreement is intended as bridge funding to a future funding round, but there is no guarantee that the business will be able to secure further funding.
Important information about AutoInvest
AutoInvest enables you to automatically invest in regular equity campaigns that meet certain criteria selected by you. Once you opt in to autoinvest, investments will be made into campaigns that meet the criteria without you needing to select individual campaigns, but each investment will be structurally the same as if you had invested into the campaigns individually. You are able to activate and pause AutoInvest at any time, and you will have a period of seven days to cancel an investment made by AutoInvest.