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 fund and convertible campaigns
The platform provides opportunities to invest in startup and growth-focussed businesses by way of three types of campaigns: equity, fund and convertible. Information about these campaigns is available here. All the risk warnings above apply to each of these campaigns but you should also be aware of the following in respect of funds and convertibles. As each fund and convertible campaign is different, please ensure you read the campaign text and accompanying documentation carefully.
Fund campaigns allow you to invest in multiple companies, and generally are set up by a fund organiser (who may run an accelerator or venture capital fund, 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 company 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.