Gone are the days of us thinking of investing as something done by suits on the stock exchange, or venture capitalists on the prowl. Now that equity crowdfunding (ECF) is here, anyone can invest. This blog post is in the first of our ongoing Investor Education Series where we’ll be to demystifying the investment process. We start by defining 10 key investor terms to sharpen your investment skills.
1. The Deal Sheet a.k.a the Term-Sheet
When considering a current company or start-up, this is where it all starts. The Deal Sheet is basically a summary of the offer. It’s got all the basic information you will need to know about the company in which you are investing. From the most basic details – like the company’s name, to the funding request (how much they are trying to raise), the equity offer (how much equity they are giving away) as well as crucial details like shareholder rights, pre-money valuations, and other details. A term-sheet, by the way, is a non-binding document. Term sheets are often used to facilitate the negotiation of a transaction, however unlike a formal legal contract, it’s conditions are not legally enforceable in a court of law. For a sample of the term sheet, have a look at our deal page and check out our Issuers’ term-sheets.
2. Equity (sometimes also referred to as Stock Options or Shares)
If you are investing in a company you will receive shares in exchange for your investment. ‘Equity’ refers to the value of a company, divided into many equal parts owned by the shareholders, or one of the equal parts into which the value of a company is divided. When it comes to investing, there are actually a number of different types of equity. As a retail investor however, the Securities Commission of Malaysia requires that all shares issued via equity crowdfunding have to be ordinary shares (also known as common shares), which only receive dividends at the discretion of the corporation’s management with non-voting rights. (We’ll take a closer look at what this means in subsequent articles our Investor Education Series Blog, so stay tuned!)
3. Investment Offer
This term is very straight forward. It is the full amount any company or start-up is seeking to raise in any given round of fundraising. In the case of equity crowdfunding, the company will exchange a specified amount of equity in exchange for the funds received from their investors.
4. Seed Funding (sometimes referred to as seed capital)
A small round of funding that is raised by a very early stage usually used for commercialisation. This type of funding is to introduce a company into the market and often prior to scaling up. When you first start a company, funding is required to take it to profitability, whether that’s funding the prototype or financing office space and staff. Some (few) startups successfully bootstrap with their own funds, but the vast majority will burn through their savings so fast that without funding from an external source, they die. That’s where seed funding comes in. It’s where an investor invests capital in exchange for an equity stake in the company, usually at a very early stage of the company’s growth. Essentially, that capital is the ‘seed’ planted, to help the company grow and get to a stage of profitability. It’s often viewed as a ‘risky’ investment, as many investors like to wait until a business is more established before making larger investments of venture capital funding. However it’s also what determines whether promising companies ever get the chance to get their ideas off the ground and see their potential come to fruition.
5. Series A Funding
If seed funding is about planting the seed you hope will grow into a tree, Series A funding is nurturing it with fertiliser, to help it grow big and strong. Series A funding refers to the company’s first significant round of financing for scalable growth. Perhaps the company has proof-of-concept, it has a product that sells but now needs to raise capital to expand its operations so it can start growing and generating more profit at scale. Series A funding is usually raised from institutional investors such as Venture Capitalists or Private Equity Firms.
6. Pre-money & Post-money Valuation
Any company that seeks to raise funding in exchange for equity has a pre-money valuation. The pre-money valuation is the company’s own valuation of its total value prior to funding. A post-money valuation is when this value has been adjusted to take account of the funding raised. For example:
Company X says their pre-money valuation is $8,000,000. Say they are looking to raise $2,000,000 in exchange for 20% equity. This means that the valuation of the company after successful fundraisingor post-money valuation is $10,000,000. $8,000,000 + $2,000,000 = $10,000,000 This means that the new investors now own 20% of the company which is worth $10,000,000 post-money valuation.
7. Due Diligence
Investors need to be diligent, or focused and determined, to have a successful investment strategy. Due Diligence requires investors to perform a complete and thorough assessment and audit of the prospective company in which they invest. It means evaluating the management team, financial statements, and market opportunity among many other factors. Venture Capital firms and Private Equity firms will never go forward with an investment without performing due diligence. This a cornerstone of any proper investment firm. In the case of Equity crowdfunding, licensed ECF Platform operators are required, among other things, to conduct due diligence on prospective issuers and ensure the issuer’s disclosure document is verified and made accessible to investors. However as an investor, it’s always good strategy to research and learn as much as you can about a company before investing.
8. Investment Agreement (or Subscription Agreement)
An investment agreement, also known as a subscription agreement (usually when purchasing IPO Shares) essentially includes all the nitty-gritty details you need to know regarding your rights of ownership of investing in an ECF company. To put it simply, it is the documentation of the investment and agreement of transfer of shares between an investor and an Issuer.
9. Dividend Policy
Dividends are a way for companies to channel profits back to their shareholders. A company may choose to implement a dividend policy. Start-ups don’t usually pay dividends at an early stage, but rather at a later stage, when the company has grown and had a chance to become profitable.
As an investor, you will most likely be looking to make money from your investment through an exit. This means you buy the shares now with the intention of selling it later or exiting later. Typically investing in private limited companies, an investor can make an exit through one of four avenues:
Buy-Back this happens when the start-up is able to buy back the shares from you at a pre-agreed price.
Further Investment Rounds – when a start-up goes for Series A Funding, they may give you the option to exit.
Trade Sale – this occurs when a company is being acquired by a bigger corporation.
IPO – when the company is big enough to sell off their shares in an IPO, this will make for an ideal exit (any investor’s dream!).
You must be aware that as you invest in Equity Crowdfunding platforms in Malaysia, you are primarily investing in SME’s, to be specific Private Limited Companies or Sendirian Berhad Companies only. Bearing this in mind, investing in startups is a medium to long-term investment.
Where Uber has disrupted the transportation service and allows for anyone to become a driver, Equity Crowdfunding is disrupting the world of investment as a vehicle for alternative financing and a way for lay people to participate in SME growth. Anyone can invest now and we will bring you all you need to know about the mechanics of such investments.
Thanks for taking the time to learn investment basics. Let us know if you found it helpful or whether there’s any blog topics you’d like us to tackle in our Investor Education Series in the comments below!
For updates on investment opportunities on the Ata Plus crowdfunding platform, follow us on Facebook and Twitter, or visit our Deals Page at www.ata-plus.com/deals
Sayonara for now!
Ata Plus Team