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What To Research Before Investing In a Private Company: The Investment Risks (Part IV)


Phil Haslett   August 24, 2015

This is the fourth and final installment in our series on making a private secondary investment (Parts I, II, and III are available here, here, and here). This week, we'll discuss Investment Risks.

As eager as you may be to pull the trigger and make secondary investments, we urge you to consider some of the risks of any investment. We'll cover them in detail below.

1) Investments are NOT guaranteed

As we've written about before, late-stage private companies still carry a large element of risk, and can go to zero (or sell for a pittance). Recently, two such examples were Fab (previously worth $1 billion) and Gilt Groupe (also $1 billion). Remember that though the success rate of these investments is certainly higher than Angel- or Seed-investing, you can still lose all of your money.

2) Time to exit (by way of acquisition or IPO)

Sometimes, things just don't go as planned. Companies have even been known to talk about a future IPO many years before it actually happens: Eventbrite's CEO talked about their next round of financing being an IPO in June 2012 (they have since raised $190 million).

3) Liquidation Preference
Most secondary transactions will involve common stock. Venture investors are usually issued preferred stock, which comes with structural seniority to common stock (more about his here). As a result, in certain acquisition scenarios (especially small ones), common stock shareholders could be left with less of a distribution than that of the preferred shareholders (and sometimes nothing at all). Get Satisfaction, a customer-service platform, was acquired by Sprinklr and its Founder wrote about how he and other employees received absolutely nothing.

Consider the scenario that in fire-sales, your equity investment may not be worth anything.

4) Future Dilution

Your investment could be diluted should the company opt to raise more capital. This will lower your effective percentage ownership in the business, though hopefully your slice of the pie has grown in size. Remember also that an IPO will dilute your ownership, as most IPOs involve a significant raise of capital. In the example of Etsy’s IPO, current shareholders will be diluted by about 13%.

5) Market Risk

Private investments are subject to the same market risk of public stocks. New competitors, a slumping economy, interest rate hikes, and myriad other market factors can impact the valuation of private investments.


Secondary investments offer a great opportunity to diversify your portfolio and get exposure to venture-backed companies before they hopefully go public or get acquired. However, keep in mind that these investments still carry large amounts of risk, which should be assessed before making any investment.

What To Research Before Investing In a Private Company: The Investment Structure (Part III)


Phil Haslett   August 17, 2015

This is the third installment in our series on making a private secondary investments (Part I is available here and Part II is available here). This week, we'll discuss Investment Structure.

It's an exciting time for accredited investors, with increasing access to private secondary investments. But, as Shri Bhashyam, our in-house lawyer, always reminds me, the devil is in the details. Before you invest, be sure to understand what you’re investing in and how that investment is made.

Direct vs. Fund Structure

Direct Investment
In its simplest construction, an accredited investor will be the direct owner of the shares that are the subject of the investment. In the case of a share purchase, the investor will be listed on the company's cap table and get direct updates from the company, should the share class they own be privy to any.

At the time of acquisition or IPO, the investor will be contacted directly by the company's Equity Administration team or Transfer Agent.

Unfortunately, direct share transfers for each investor heavily burdens a company's Legal and Equity Administration teams (if they even have one). Why? Let's consider a transaction where an employee shareholder sells $1 million worth of stock to 50 investors, each investing $20,000:

For one, the company would need to process 50 separate transfer notices (the transfer notice is a required document that sets out the terms of the proposed share sale).

Additionally, the company would need to determine if it should exercise its Right of First Refusal (ROFR) for each of the 50 purchases. Should they opt not to exercise their ROFR, they would now add 50 new investors to their cap table.

As a comparison, when a company goes through a large Venture Financing, they may only add 2 or 3 new investors to the cap table. So adding 50 people is a ton of work!

In direct investments, the investor typically pays an upfront commission on the transaction.

Fund Structure
The solution to the aforementioned problem is a fund structure. In this type of investment, investors are purchasing an ownership interest in a fund (usually a partnership or an LLC), which will hold the private shares as an investment. In the case of a share transfer, this means that the fund, rather than the specific investors, is purchasing the shares from the shareholder. As a result, only one transfer notice needs to be submitted to the company, and the company will only need to add one name to the cap table (the name of the fund).

At the time of acquisition or IPO, the Fund will be contacted by the company's Equity Admin team or Transfer Agent, and the Fund will be responsible for any distributions of shares or cash.

With a Fund Structure, investors can be charged in various ways: an upfront sales fee, an annual management fee and expense fee, and carried interest (where the Fund's manager will keep a percentage of any profits).

The benefits of the fund structure are that you have access to more deals at a lower minimum investment amount, and also are part of a fund that's being actively managed on your behalf. The consequences are that you have less control compared to a direct investment.


Qualified investors can invest in late-stage private companies either directly or through a fund structure, and it's important to know the difference. In each case, understand how the share transfer will take place: a physical share transfer, or a derivative. If it's a derivative, is it company-approved? If not, beware of the risks involved.


What To Research Before Investing In a Private Company: The Current Investors (Part II)


Phil Haslett   August 10, 2015

This is the second installment discussing what you should research before making a private secondary investment. This week, we'll talk about Current Investors.  In case you missed last week's post, please click here: Part I.

Available information about private, venture-backed tech companies can be limited when you're assessing a secondary investment (that is, buying shares from a pre-existing shareholder). However, the company's current professional investors are usually well-known. EquityZen provides this information on our Trending page and on EZ Advantage - check them out.

Investor Type

There are a few different types of professional investors (that is, anybody that makes venture investments for a living) to keep an eye out for. It's important to understand the difference as different investors have different motivations.

Venture Capital: VC's are looking for outsized returns, and have non-permanent capital. That means that they money they have raised from their Limited Partners (LPs) needs to be paid back in a finite amount of time (typically 10 or 15 years). Because of that, VCs are motivated by liquidity: they need their portfolio companies to eventually be acquired or go public, so that they can cash in and return $$ to their LPs. (Examples of VCs: Sequoia Capital, Andreessen Horowitz, Index Ventures)

Strategic Investors: Strategic investors are usually large companies from a similar sector that are investing to establish a relationship with the private company. "Strategics", as they are known colloquially, do not have LPs and can typically be more patient with their investments. Additionally, the involvement of a Strategic can provide a private company with a natural acquirer down the road. (Examples of Strategics: Salesforce, Google, Facebook, Oracle)

Institutional Funds: Institutional investors include Hedge Funds and Mutual Funds. These investors typically invest later in a company's life-cycle, once they've had visibility into a proven revenue and growth model. (Examples of Institutional Investors: BlackRock, Tiger Global Management, T. Rowe Price)

WHAT: The Investor's Track Record

While past performance is not always indicative of future results, it would make sense to follow the investments of successful firms. Fortunately, VCs have a knack for bragging about their investment portfolio, usually on their own website. Some VCs have even offered up their historical return: Institutional Venture Partners boasts their incredibly impressive 43.2% IRR on their website.

Some researchers in the space have also published the most successful investors (Check out CB Insights' piece: "Which Venture Capital Firms are Best at Spotting Unicorns Early?")

WHEN: What Stage is the Company In?

Different investors in different staged companies. For example, Y Combinator acts as an accelerator and early-stage investor. Therefore, expect lower valuations and a longer time to eventual exit. Institutional Venture Partners, on the other hand, looks to invest in companies "with over $10 million in revenue". By knowing what stage the investors typically invest in, you can get a handle on when a company may be looking to go public or get acquired.


Research the current investors of a company to help make your secondary investment decision. Ask WHO/WHAT/WHEN: who are the investors, what have they invested in historically, and when do they typically invest? While you can't always get as much information about a private company as a public one, you can learn a lot from the professional investors that are already involved.