Accredited investor – what makes you one and why does it matter?

Online alternative finance platforms have become commonplace in today’s investment world, growing to ~$35 billion in total market volume in the U.S. alone. These platforms use technological innovations to change the way people invest and what investments they can access, opening many markets that were previously inaccessible to the crowd. However, this “crowd” is many times still quite limited as many platforms allow only accredited investors to invest in their offerings.

accredited investor, keep enjoying favorable access to investment opportunities

What is an accredited investor?

(note: we’re going to focus on individual investors and not companies)

In the U.S. an accredited investor is one that has a net worth of $1 million (excluding the person’s primary residence) or an income of at least $200k in the last two years ($300k for a couple) with the expectation of keeping such income in the next year. In other countries, the term (sophisticated/qualified instead of accredited) and the asset and income thresholds may be different, but the idea is pretty much the same.

What are the benefits of being an accredited investor?

Accredited investors are allowed to invest in securities that are not registered with financial authorities. They basically get privileged access to investment opportunities that other individual investors cannot invest in.

When a company or a fund wants to raise money, it has to register its shares or securities with the local financial authority (e.g. the SEC). This registration is all for investor protection. The regulators want to ensure that these companies are legitimate businesses and so they require them to provide certain information upon registration and through ongoing reporting to make sure that’s indeed the case. Since the registration can be costly and burdensome, some companies prefer to use exemptions that allow them to offer securities without registering them. One of the most popular exemptions allows these companies to offer their securities to accredited investors only (and 35 other non-accredited investors, even though that allocation is rarely used).

For example, if you want to get unique access to startup investing through our EquityBee platform, you must be an accredited investor since our securities are not registered with any financial authority.  

The regulators decided that investors who have enough money are sophisticated enough to invest in companies without the oversight and reporting requirements that come with SEC registration. These investors can also afford the higher risk of such investments given their financial situation.

Does this definition make sense?

Let’s break accreditation into two: knowledge/sophistication and money. These two together put the regulators at ease that this group of investors is capable of analyzing private investments and take the associated risk.

Money sometimes translates to investment sophistication, but not always. Therefore, the SEC should consider adding true sophistication qualifications to the definition of an accredited investor. While wealth doesn’t necessarily translate to investment sophistication, it’s easier to argue that certain degrees and certifications do.

Now to the money piece: accreditation thresholds in the U.S. were put in place in 1982, when less than 2% of the population met them. A million dollars can buy a whole lot of less in 2018 than it did in 1982, so it may be time to re-evaluate these thresholds as well.

In the meantime, if you are an accredited investor, keep enjoying favorable access to investment opportunities, but remember that this increased access comes with additional risk that you must asses carefully.

Everything you need to know about Preferred Shares in Startups.

Your scroll down TechCrunch’s homepage as you sip your morning coffee – and BOOM! You see that your friend’s startup just raised a $50m from a top-tier VC. The VC will now own 20% of the company, approximately what your co-founder friend now owns.

Are those 20% stakes equal?

Preferred Shares in Startups.

When startup founders raise money from investors, they’re basically selling shares of their company. They are looking to sell to people who want to invest in it. But not all shares are made equal. The shares that investors acquire are typically superior in some ways to the ones startup founders own or startup employees get (through their stock options). They are preferred to the founders’ and employees’ common shares.

So, what makes preferred shares preferred? Continue reading

What is a Liquidation Preference and Why Should You Care?

Even though it could significantly impact how much cash is left in their pockets post exit, liquidation preference is a term that’s often overlooked by founders, discounted by beginner and early investors, and could be a complete unknown to startup employees.

We’re here to fix that.

liquidation preference

What Is A Liquidation Preference?

When angel investors and venture capital funds invest in startups, they essentially acquire preferred shares. A liquidation preference, among other, is one of the terms or characteristics that makes a preferred shared preferred. In one sentence, it ensures that investors get their investment (or a multiple of it) back before any of the common shareholders (the founders and employees) get a dollar. Continue reading

What Happens to Your Stock Options When You Leave a Startup?

Hi Monica, it’s Richard, Pied Piper’s recruiter. The entire team loved you and I’m excited to extend you an offer to join Pied Piper as a Director of Winning. We think you’ll be a great fit here culturally and we really hope you decide to join the team. We have a few other candidates we really like, so I’ll need a decision by the end of tomorrow, ok?

Well that happened fast. You weren’t really even in the market for a job because you like your current one, but they reached out to you and Pied Piper is such a cool company and this will look great on your resume and you could really use the salary bump if you’re ever going to be able to afford buying a house.

You have to take this job. And that means you have to leave your current one. With that decided, what happens to your stock options when you leave a startup and decide to move on?

stock options when you leave a startup Continue reading

Everything You Need to Know About Early Exercise and 83(b) Election

You just joined this hot new startup that uses AI to create a snack menu for puppies based on trends in their tail movement. You believe this company is going to be big and you can’t wait for your options to vest so you can early exercise them and become a shareholder.

Good news! There’s a chance you don’t have to wait at all.

early exercise

Many startup employees believe they must wait for their stock options to vest before they can exercise them. That makes perfect sense, right? How could they exercise their options if they don’t even legally own them yet? Well, things don’t always work the way we’d expect them to.

Enter EARLY EXERCISE! Continue reading

Startup Investing Basics. If You Know Nothing, Read This

Startup Investing Basics.

A lot of great content about the fine art of investing in startups and catching unicorns has already been published. It is too broad of a topic to cover in just one blog post or even a series of posts. So before we go on and write a full blown series, we thought we’d start with something that’s easy to digest and provide a few rules of thumb for investing. In future posts we’ll dive in deeper into the subject of investing and also provide references to our favorite startup investing resources.

But until then…

The first thing you need to know about investing in startups is that it’s hard. Continue reading

What Happens To Your Stock Options (and Shares) When The Company Gets Acquired?

The primary goal of most VC-backed companies is an exit. There are essentially two ways to achieve such goal: go public or get acquired by another company. Last week we discussed in detail what happens to employee shares and stock options when a company goes public. This post will cover the more frequent exit event – an acquisition.

The M&A

While the dream for many startups is to go public, in reality the M&A (mergers and acquisitions) route is a much more common one. According to CB Insights, only 3% of exits in 2015-2016 were IPOs (initial public offerings), while the rest (about 6,700 out of 6,900 exits) were through a merger or an acquisition.

your stock options when the company gets acquired

Whether it’s a direct competitor, a large company that wants to expand online, or the corporate incumbent your company was trying to defeat, the possibility that one of these companies will acquire the startup you work for is your best shot for an exit.

But what happens to your shares and options when that happens?  Continue reading

What Happens To Your Stock Options (and Shares) When The Company Goes Public?

Spotify and Dropbox are two big tech players (which we use. A lot!) that are going public at multi-billion dollar valuations. Great news, right?

It’s safe to assume that going public is a good outcome for most startup founders and investors, but what does it mean for their employees? What happens to their stock options or shares when the company goes public? Can you get $5.2 billion richer like Facebook employees did? This post will discuss just that.

your stock options when the company goes public Continue reading

Should You Exercise Your Stock Options After Leaving a Startup?

You left your job and you are now focused on your next challenge. Getting ready for the first day on the new job, you suddenly get an email from your previous employer. The subject line reads: “Your options are about to expire”. You open the email and realize you only have a few weeks, or even days, until your options are gone. So should you exercise your stock options after leaving a startup?

It’s decision time.

To exercise, or not to exercise? That is the question.

should you exercise your stock options after leaving a startup

Continue reading

When Should I Exercise My Stock Options?

You just started a new job, got a new laptop and after some negotiations, a shiny stock option package. One thing you could do is forget about your stock options and be surprised (really surprised) when the time comes to exercise them. You could also make the more responsible choice and evaluate, upfront, the different options you have in terms of exercise timing. This post will try to help you with just that.

when to exercise your stock options? Continue reading