Equity investing explained
Hey, future Chip investor. So, you wanna know more about this equity business before you go all in? Smart move. Here’s the deal.
What is equity investing?
When you invest in a startup, you’re funding them to continue doing the awesome work they’re doing, and you’re also buying a chunk of the company. When you invest in Chip, for example, you’ll become a direct shareholder in the company. Being a shareholder comes with various perks, depending on which type of shares you buy.
There are two types of Chip shares up for sale. If you invest between £10 and £6,000, you are buying B shares. B shares give you rights to a payout when Chip exits, but don’t give you voting rights. If you invest £6,000 or more, you’re buying A shares. Each A share that you own gives you the right to a vote on certain company decisions, as well as your payout when Chip exits.
Why startups love crowdfunding
For entrepreneurs at the helm of young startups (like Chip) there are a couple of ways to fund your development and growth. At the very start, you can borrow money – from banks, friends, family or your own piggy bank.
When you get a bit bigger, you need to start attracting investment in exchange for equity. Most entrepreneurs kick things off by approaching venture capital (VC) firms and Angel investors. Once people are using (and loving) your product, you can launch a Crowdfund – like Chip did in November 2017. That was the 3rd most popular investment raise on Crowdcube ever. This year, we are back for more.
It’s awesome for a startup to be owned by fans of the product, alongside the founding team and early investors. Chip is designed, built and tested by its savers, for its savers – so it makes sense that the savers also have their names on the share certificates.
Why People Invest in Chip
We’d guess that you’re interested in investing in Chip for one or both of the following reasons:
You like the product and want to see it succeed/you’re eager to get your hands on Chip 2.0 & ChipX
You’re optimistic about the future value of the company, and therefore the future value of your investment
We’re not allowed to promise you that investing in Chip will make you rich (in fact we have to remind you that your capital is at risk) but we can promise that your investment will help fund, shape and design our sweet new features.
And, don’t forget, if you become an investor you skip the 75,000 long queue to get your hands on Chip 2.0 and ChipX.
If that’s not Xciting, we don’t know what is!
Share structure and dilution
So, you invest in Chip. We continue building the best savings account in the world and you own a piece of the company. But how much of the company do you own, and what happens to your piece in the future? The best way to understand equity is by imagining that the startup is a pie.
At the start, the founder, in this case Simon owns the whole pie. It’s a tiny pie, but it’s all his. Then, he gets some investment, so the pie grows larger. But the investor takes a slice of the (now larger) pie. Simon does not own the whole pie anymore, but his slice of the enlarged pie is larger than the initial tiny pie was.
With each new investment, each chunk of equity represents a smaller chunk of the total equity. This is called dilution. So, by investing in Chip now, your chunk of the company may be diluted over time.
Getting your money out
Making an equity investment is a commitment. Unlike buying shares in a public company, which you can trade any time, buying a stake in a startup means you don’t get your money back until the company ‘exits’.
There are a couple of ways you might get your money out of your investment in Chip:
We take investment from a VC firm who offers to buy out some (or all) earlier investors
We are acquired (bought by) a bigger company
We go public in an Initial Public Offering and list our shares on the stock exchange
If any of these things happen, you’ll make a profit from your initial investment. Various startups have raised investment through CrowdCube and gone on to exit the business and generate a healthy return for their investors. Camden Town Brewery was acquired just eight months after its CrowdCube fundraise, and the sale delivered ‘a multiple return’ to its 2,173 investors.
At this stage, we can’t predict which type of exit will happen, so we can’t tell you exactly when or how you will exit your investment. However, we will keep you fully informed of our progress at all times.
What are the risks?
Along with the dilution of your share in the business which we discussed earlier, there are two things to be aware of before investing.
If Chip fails, you might lose your money.
Basically, if Chip doesn’t make it to any of the three exit strategies laid out above, you won’t get your money back and you won’t make a profit. Don’t invest any money that you can’t afford to lose.
If Chip grows slowly, you might be waiting a long time for a return.
Your investment could be locked into the company for a long time, as you don’t get a return until we exit. Don’t invest any money that you might need suddenly in an emergency.
Still With Us?
That’s the end of the fine print. It’s decision time. If you want to invest in Chip and own equity in this awesome startup, you know what to do.
For more information about how your capital is at risk, please head over here: https://www.crowdcube.com/pg/risk-36