Most of the investments CrowdRating covers are Equity opportunities– you are buying a share of the company. There’s a lot of concepts it’s important to understand in order for you to properly manage your investments.
You should be issued with a share certificate to record your investment - the company isn’t obliged to offer you one, but it’s a good idea to ask.
The company has a duty to keep you in the loop. Some do the bare minimum, while others are much better about communicating with shareholders. As a shareholder you are entitled to see the Annual Report and accounts, but the company might insist you visit the offices to see these.
Ordinary Shares entitle you to benefit from the company’s growth – the value of your shares increases or decreases in line with the company’s valuation and you can realise that value by selling your shares. When the company has made sufficient profits it may decide to pay out Dividends, and you will receive a portion of these in line with your shareholding.
Sometimes investors are given Preferred Shares. If the company becomes Insolvent preferred shareholders are reimbursed before ordinary holders (but after anyone the company is in debt to), so preferred shares are slightly less risky and are favoured by Venture Capitalist’s. Preference shares normally have different dividend rules though – you may only receive a fixed return, but on a defined schedule (whereas ordinary shares only get dividends when the board agrees to do so). The exact terms offered to preferred shareholders vary a lot, so you should check the terms before investing.
Convertible Shares are shares that can be changed to some other type of asset when certain conditions are met. For example, a preferred share might have the right to convert to an ordinary share. Convertible debt is another common mechanism – this is a loan paid to the company that can be turned into equity rather than being repaid.
Some shares come with Voting Rights, which give you a say in key decisions that the company makes. Preferred shares often don’t have voting rights, and in crowdfunding companies it is common for voting rights to only be offered to people investing above a certain threshold (say, £1,000 or £5,000).
There are a lot of people in the crowd, so Nominee Accounts are another common practice. Rather than directly holding shares in the company, the equity will be given to a nominee (often a shell company operated by the crowdfunding platform), who represents the interests of the investors. Returns, votes and regular communications from the company are managed by the nominee. This can dramatically simplify housekeeping for the company.
You won’t directly hold shares in the crowdfunded company, but you are the Beneficial Owner of the shares the nominee holds on your behalf. You may or may not be entitled to attend AGM’s and your voting rights may be handled in a few ways. Normally you will either be granted proxy voting powers from the nominee for your shares, or you can instruct the nominee as to how you want your vote to be cast. Some nominees, though, may override the wishes of their members and vote according to the internal majority, or even vote against that, when they believe that is the right course of action.
Companies will normally need to go through multiple rounds of funding. If this happens you may find your shares being devalued or even destroyed. If your shares didn’t come with Pre-emption Rights (again, these are normally only offered to people investing above a certain threshold) then the company won’t be obliged to offer you new shares or to even tell you that they’re being issued – your shareholding could be diluted. With pre-emption rights, the company should offer you at least enough shares to maintain your overall ownership and may even give you the chance to take a bigger stake.
Hopefully one day the company will reach a point where it’s an obvious success. Someone will offer to buy it whole (a Trade Sale), or it might float on a stock market like the LSE AIM (Alternative Investment Market, a stock market for smaller companies, typically valued at £100m - £1bn). When this happens you will be invited to sell your shares to new investors, or to hold on to them if you think they could become more valuable.
A company may also offer to buy back shares from investors. This would be funded by the company’s cash reserves. Shareholders that don’t sell will own a larger share, but the company’s value will have decreased slightly since before the buyback because its cash reserves are lower. All in all it should be a net-neutral transaction for those who don’t sell.
Not all exit routes are S/EIS eligible, so you should keep this in mind before you sell your shares.
Sometimes the price of an individual share might grow large enough that it’s impractically expensive. When this happens the company may decide to split shares – the number of shares you own will be multiplied, while their value is divided proportionally. For example, in 2014 Apple’s shares were worth almost $700 each, so they were split on a 7-for-1 basis, reducing the price-per-share to just under $100. A shareholder who owned 1 share before the split now owned 7 at the new value, so they were no better or worse off. The benefit is that cheaper shares are easier to trade. Berkshire Hathway’s shares are priced at over $200,000 each but only a few hundred are traded each day, while Apple shares are worth under $100 and around 40m change hands each day.
Sometimes the opposite happens and a company consolidates its shares. Eg, RBS did a 1-for-10 consolidation in 2012 when its share price dropped to 20p. Such low prices (‘penny shares’) can be embarrassing to the board and deter ‘serious’ investors. A consolidation can also reduce the number of shareholders – someone who’s holding falls from 800 shares to 80 might feel less engaged. Consolidation will only result in a whole number of shares being issued. For example, an RBS investor who held 101 shares would have 10.1 after the consolidation. That 0.1 remainder would have been bought by RBS during the consolidation and the investor should have been compensated accordingly.