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

Phil Haslett
Aug 24th, 2015

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.