Below are some of the risks associated with smaller, private companies, like those listed on Equivesto.

Investment Risks

Liquidity Risk

Private companies, unlike public companies, are not openly traded on a stock exchange.  That means there is no ability for an investor to sell their investment to another person.  On a public stock market, if you decide on a given Tuesday that you want to sell the shares you hold, you can sell them directly to another investor at the market price.  Shares in private companies are not able to be sold openly between investors.  When buying the shares on Equivesto, you are directly buying the shares from the company itself.  There may be no opportunity for you to sell these shares to another person for the short to medium term, or potentially at all.  Because you cannot quickly sell these shares, in investing terms, they are referred to as illiquid.  You should not invest any funds that you plan to need sooner or later.   

Principal Risk

Investing in private businesses is high risk, and puts the entire amount of your investment (the principal) at risk.  There is a chance the business could fail, and you could lose your entire investment.  Many small businesses and start-ups do fail, and you should not invest any amount that you are not willing to lose in its entirety.  

Returns Risk

The amount of return on investment in any private company is highly variable and not guaranteed.  Any projections or future plans for dividends or exit by any company is speculative, and not a promise or guarantee.  Some companies may be successful in generating large returns, but many will not be successful, and will only generate small or no returns.  Returns will vary in amount, timing, and frequency.  You should not invest any amount from which you require consistent, predictable, or stable returns.  

Delay of Returns

Returns in small businesses and start-ups make take years to materialize.  Many companies on Equivesto are new and make take several years before they make consistent profits.  Most start-ups take 5 to 7 years to generate any return on investment, if at all.  Do not invest if you expect to receive returns within a certain time frame.  

Security Risks

Instrument Risk

On Equivesto, you can invest in a variety of securities, but most often will be in Non-Voting Common Shares.  Common shares are are lowest in seniority of shares a company can issue in terms of dividend payments and return of capital if the company dissolves. Also, non-voting shares are shares that do not have any say, or voting power, at shareholders meetings (annual meetings to discuss the success, plans, and management of the company).  They do not have the ability to control or manage the company or its Board of Directors (leaders of the company chosen by the shareholders). Before investing, you should take the time to understand the type of shares you are investing in and the related rights and risks.  

Dilution Risk

Many companies need to raise funds multiple times over the course of their life.  If a company issues equity (shares) to raise additional funds, the total number of shares of the company increases, and the relative percentage ownership of existing shareholders decreases.  Before investing, take the time to review the shareholders agreement to understand the dilution controls (if any) in place to protect shareholders, and how frequently the Board of Directors can issue new shares.  

Minority Stake

With equity crowdfunding, you are investing as a small portion of a larger group.  As such, you are a minority shareholder in the company.  There is risk that the controlling shareholders of the company may make decisions that are not in your best interest.  As a minority shareholder, you have less ability to control or influence the decisions made by the company.  If you have non-voting shares, then you have zero ability to control important decisions or elect those who make them.  Before investing, review the shareholders agreement to determine what rights and protections exist for minority shareholders. Equivesto highly recommends that each company include in its shareholders agreement a ‘drag along right’ and a ‘tag along right’ which ensures that, in the event of a potential sale of the company, the majority shareholders must sell the whole company and allow the minority shareholders to sell as well, as opposed to simply selling their own majority shares and leaving the minority shareholders in the company. 

Valuation Risk

Unlike public companies, whose value is set by the market during trading on a stock market, the value of a private company is hard to assess.  During a campaign on Equivesto, the valuation of the company (and the share price you will pay) is set by the company, and you may risk overpaying for your investment.  The price you pay for your investment will have a direct impact on your potential future returns.  While Equivesto does provide advice to companies regarding their valuation, we seek to do so as an objective third party, and the final decision on any valuation is made by the company and the company alone.  

Business Risks 

Failure Risk

Companies on Equivesto are often start-ups or small businesses.  Investments in start-ups are speculative and the companies themselves often fail.  Start-ups, by their nature, are new companies, often with new ideas or a different approach to doing business.  They do not have a track record of revenue or income, and if they are unsuccessful in marketing for their products or services, they could fail.  When investing, you should be able to afford and be prepared to lose your entire investment.  

Revenue Risk

Start-up companies are in an early stage of their development and growth.  There is no guarantee that they will be able to generate revenue from their concept, and no guarantee that they will generate enough revenue for profits.  The potential for profitability should be considered against the problems, expenses, difficulties, complications, and delays that start-up companies and small businesses often face.  The company many not overcomes these challenges to become successful. 

Funding Risk

Even thought the company has raised funding using Equivesto, the company may still require additional funding in the future.  This funding could be operating expenses, the development of a new product or service, marketing its goods, or entering a new market. Due to market conditions at the time it requires funding, the company could be unable to raise this funding, or the terms could be unfavourable.  If the company is unable to obtain - funding when it is needed, it may be unable to repay its creditors, or the terms of the new funding could dilute the ownership of existing investors.  If the company cannot get the funds it needs, it may delay or halt its development, and could even to into bankruptcy.  

Disclosure Risk

Start-ups and small businesses are private companies with reduced disclosure requirements compared to public companies listed on a stock market.  As such, investors will have less information when reviewing the company prior to investmentand when monitoring the progress and success of the company in the future. 

Personnel Risk

Start-ups and small businesses have small management teams, who are often the founders of the business, and may be dependent on the technical knowledge and abilities of one or two key employees.  An investment in the business is also an investment in the team managing the business and other key personnel.  The success of the business will often rely on the ability of the management team to follow through on the business plan,  overcome unforeseen obstacles, and retain key personnel.  You also need to be aware that a portion of the funding raised on Equivesto may go to compensating the management team and the company’s employees. Equivesto carefully reviews the use of funds disclosures and the expertise and experience of the management team before allowing an issuer on the site, but as an investor you should consider them as well.  

Fraud Risk

It is possible that certain individuals involved in the company may mislead investors or commit fraud.  If this occurs, it is possible that your total investment may be lost.  Review the management team carefully and make your own determinations regarding the potential for any fraud.  

Lack of Professional Guidance

Some start-ups and small businesses attribute their success to the involvement of professional investors.  These individuals can bring industry contacts and business expertise that can help start-ups and small businesses succeed.  A company financed by many smaller investors may not have access to the same support and guidance from professional investors.  You should consider which, if any, professional investors are already invested in the company, and whether any professional investors plan to invest in the future.  

Growth Risk

Many start-ups and small businesses require large growth in their futures to become successful.  This growth can require large changes to an organization, including the development of new technologies and procedures, and the hiring of new staff. This can all add significant strain to the management of the organization. There can be no assurance that the existing systems and supports of the company will be capable of handling this growth, nor that the management team will be successful in managing the growth of the company.  The failure to effectively control this growth could lead to negative repercussions on its business, operations, and profitability.  

Competition Risk

Small businesses and start-ups often face competitors in their space or industry.  Competitors may already exist that offer similar or the same product, or new competitors could arise in the future that offer similar products at similar or lower prices, reducing the start-up’s demand and profitability.  These changes could cause adverse effects on the profitability of the business and its ability to meet its financial projections. 

Market Demand Risk

While the companies believe that they have interest from the market for their product or service, there is no guarantee that the market will accept, or continue to accept these offerings.  The interest in their offerings could also be impacted by changes made by competitors, or other factors beyond the companies’ control.  The impact of these changes could have an adverse effect on the profitability of the companies, and their ability to continue operations.  

Control Risk

The founders and management team of start-ups and small businesses are often also their largest shareholders or exercise control through holding voting shares while investors hold non-voting shares.  These individuals may therefore be able to control the company not only through their positions in management, but also through potential board seats and voting at the shareholder level.  This control may enable them to take the companies in directions that are not in the best interest of all shareholders.