Investing in Startups by Passing the Series 65
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Investing several thousand here or there on one or two companies seems incredibly risky, riskier than what the pros are willing to tolerate.
Perhaps it could be useful if the goal is learning oriented.
He did say he was funding college from a margin loan on his stock portfolio, however.
he said he lived in the east village, took the test in midtown
Do you think tech startups really want an investor who advises people to pirate software?
his stated goal was not to be an investment advisor though, it was to be able to invest himself
We raised some money from friends, family and angels at pre-seed, and at seed & series A, the VC didn't have single questions the cap table.
But the companies should have legal counsel, and try to use the standard YC SAFEs not to give people some weird terms. Also as a startup founder, you should make clear to family/friends/non-professional investors that investing in the startup is very risky, and as a minor investor they don't really have any rights as an investor, except hopefully have some returns for their investment.
There is some horror stories where someone gets their dentist as an investor and they start calling you every week about updates or show up at the office to chat about the business plan.
Eg. my broker (IBKR) lets me log in as a client, as a client of an advisor (who manages the account) or as an advisor (who manages an account).
Would being a legal advisor prevent me from being a independent client?
Source: I passed the series 65 and still use non-professional brokerage accounts
What rounds would you look at mostly? Assuming it's gotta be seed-ish unless you're very liquid.
I focus on seed stage as I'm seeking high risk high return exposure for this part of my portfolio (and I'm not liquid enough to participate without investing in a fund for Series A on, unless I'm leveraging as part of a transaction).
(n=1, YMMV, accredited investor)
The result is, as an individual investor, you can focus on those syndicates. Two benefits are you can spread risk by doing a wide variety of small investments, and while following more experienced individuals.
It's almost like crowdfunding for seed rounds, but still with $5k - $20k kinda checks. But it helps out a lot with the legal side of things, so you don't need an investment agreement with a dozen different investors.
https://www.finra.org/registration-exams-ce/qualification-ex...
I mean I guess it was a fun learning experience, but I'm not sure why they would go through the trouble.
One of the major differences between earth stage startup investments and normal public companies is that there is not an open market. Startups can choose their investors, and don't have to give the same price to all investors.
So yes, if you get accreditation, you will be able to find a startup to invest in... however, it isn't going to be the best startups, and you aren't going to get the same valuation that big VCs get.
One thing I didn’t understand from this article is what “giving investment advice” has to do with being an accredited investor and investing into startups. Can someone clarify that?
The article addresses this: the SEC accredited investor classification has several ways to qualify, the older ones are variants of “rich enough to presumably know what they are doing” and the newer ones added are “has one of a specified list of professional licenses/certifications that directly relate to knowing what they are doing with investments”, and the particular one that the author chose to pursue for that purpose was related to giving investment advice.
You invest as much as you can access through a credit card cash advance because:
a) FOMO
b) YOLO
c) TMI
d) TL;DR
e) ABCD
*your post wins the commentary for this entire thread.
> the unspoken secret is that accreditation — at least when investing in individual startups, and especially if the founder is a good friend of yours — is just a box you can check that nobody verifies
I've heard this as well, and it's a very sad thing, because it is one of those 'secrets' that if you knew, it'd open up a lot more opportunities for you. There are few 'secrets' separating the rich and poor, but this is unfortunately one of them.
In fact from anecdotal observation people do not invest in friends in general. It is people one or two removed who take the plunge.
A friend might say they are willing to lose 100% of their investment, but if you fail and the money is gone, there is likely to be negative effects on your friendship from both parties. Also if the financial state of your friend changes, like getting a mortgage or losing their job, they can get buyers remorse.
If you do make it big, then your friends might be annoyed they couldn’t invest (although if they are really twisted about it then perhaps they are not a great friend anyway).
The problem is variance. If 70% fail and only 10% produce meaningful returns, you want >>10 so you have a reasonable chance of getting average returns.
It's possible to get lucky with 5-10 startup investments but the common result is "lost everything" with "broke even" a close second.
This applies to working for startups as well....
Anyone can sell stock to non-accredited investors... it's just that it costs much more to do so, so most don't. Instead, they go to the already rich upper-class and make them richer when the investments pan out.
One aspect that goes completely unmentioned in all this is the racial aspect. Many people want equality today, but the fact is that for many minorities, they are dependent on an upper class that is mostly white to raise their money. Instead of being able to issue stock directly to members of their own community (and people they likely have closer relationships with), they have to make a case to people they've never met and are not daddy's best friend. If we really want equality, it's time to end these restrictions.
There are some reasonable sounding ideas they list:
- Permit individuals with a minimum amount of investments to qualify as accredited investors.
- Permit individuals with certain professional credentials to qualify as accredited investors.
- Permit individuals with experience investing in exempt offerings to qualify as accredited investors.
- Permit knowledgeable employees of private funds to qualify as accredited investors for investments in their employer’s funds.
- Permit individuals who pass an accredited investor examination to qualify as accredited investors.
you should recognize that's 6 years old and everything that was going to change has already changed, the article of this very thread is about using the new changes
> - Permit individuals who pass an accredited investor examination to qualify as accredited investors.
Only a further expansion this last point is what is on the table. As taking several FINRA tests do now allow for qualification as accredited (as seen in OP's article), and people get to submit new non-FINRA tests, their approval has not occurred yet.
Its Super effective!
Also note, outside of SV - the rate is nowhere near 2/10 billion valuations.
Making sure an investor has financial acumen helps founders focus because it is hard enough raising money from angels/VC's in $10k+ amounts - imagine if you only raised $100-$1k per person. Egad! Crowdfunding might be an exception to this - but it is fairly new.
People think there are these high-return (after adjusting for risk) investment opportunities out there off limits to the plebes. And it's mostly not true. Sure you can get lucky. But over the past decade you could have made a lot of money on boring big company investments.
I've seen the headlines that match what you said, the S&P returns more than picking various startups to invest in most of the time, and that many funds also mirror that, in reality I think all discussion about this is inaccurate, because there are additional variables to account for. Maybe actual equity will underperform just picking S&P equity. But so much more is actually happening which will never show up on a cap table or comparison of valuation growth or any mandated disclosure.
Top ones like to turn people away just for the headline that they turned someone valuable away, so they somewhat also rely on relationships and schmoozing to get in.
In reality though, so many people are all talk about their ability to actually move any money, that $1mm will get you in everywhere. You know the saying: money talks, bullshit walks.
Note: there are other regulatory gatekeeping tiers above accredited investor, but they are all self-certifications too which means you can just say you have $5mm or $10mm in net worth, etc.
Doriot slots into my "crowdfunding" comment above. Agree
That has zero to do with the existence of accredited investor rules.
In the current reality, many issuers have their own minimum investments such as $25k, $500k, $1mm. This successfully keeps out people that either don't have those sums of money or are encumbered by life expenses, far more than the accredited investor rules do.
An alternate reality without those rules also retains the ability for issuers to deny capital from whoever they want, and by soft-denying capital by setting minimum amounts.
Issuers have the rules of $25k, $500k, etc bc they really don't want to deal with inexperienced investors (doctors, dentists, etc, etc).... who get fearful when they write a check, are inexperienced and so try to micromanage, and worry incessantly about exits and can be short sighted. Angels are great at hiding all of this, until after the deal closes.
It makes sense to heavily filter people like that out - it would be damn terrible as a founder to have to deal with 300 people who all invested "their life savings of $10k". If you haven't been involved in many private deals, you might not believe that. But most deals are small, rosey-eyed-until-a-loss-might-occur "angels".
People don't need permission to fail financially, they can walk over to any casino and do that. It is merely happenstance that its two different governments regulating casinos (state) versus these particular capital formation rules (federal). But the user experience for the individual doesn't factor that in, and there shouldn't be a discrepancy at all. The argument in favor of "protecting people that actually need their money by deputizing everyone else" is so thin and weak. As we know, these kinds of "deputize everyone else" regulations only exist because a direct prohibition from the state to the individual would undermine at least one of the individual's constitutional rights.
People shouldn’t need to ask for permission to fail.
In case it isn't clear, I am not saying startup investing is a golden ticket, and my comment wasn't about startups at all, it was about all private equity and I’m not saying thats a golden ticket either.
Whether inadvertent or deliberate, an unnecessary class system exists which should not.