Understanding different deal types at VentureCrowd
At VentureCrowd we offer a range of venture and property deal types to offer diversification opportunities to our investors.
In this post, we’ll share about the different deal types available via our platform.
Wholesale vs retail
A retail investor is an individual or non-professional investor who buys and sells securities through a variety of means, including crowdfunding platforms. They invest smaller amounts than wholesale and institutional investors.
All investors are treated as retail investors unless they’re certified as wholesale or sophisticated investors (investors who have a high net worth and/or extensive experience in financial markets).
Wholesale investors are typically more experienced investors who have the resources and opportunities to invest in higher quality and higher risk assets.
Learn more about retail and wholesale investors here and learn how to be certified as a wholesale investor here.
Ordinary Shares
These deal types apply to both ventures and property and both retail and wholesale investors.
With ventures, ordinary shares represent basic ownership in a company. When you own ordinary shares in a private company, you become a shareholder and have certain rights. You can vote on important company matters, like choosing directors and potentially receive a share of the profits when there’s an exit event (either a trade sale, merger or IPO).
Public companies' ordinary shares are listed on stock exchanges, like the ASX, and can be easily bought and sold by anyone. These companies must follow strict regulations and regularly disclose financial information, and they generally have large investor bases.
Private companies have fewer shareholders, and trading their ordinary shares is less common. They have fewer disclosure requirements and keep their financial information more private. Public companies' share prices are determined by the market, while private companies' valuations are often based on independent appraisals or negotiated agreements. At VentureCrowd, companies are private, but they might also be listing on the stock exchange for the first time (through an IPO).
Generally, investments in private companies are illiquid, meaning you can’t sell or transfer your shares to someone else. Investors then wait for an exit event to make a return on investment. This can take anywhere from 6 months (rare) to 10 years or more (more common), especially if the initial investment is in the early stages.
If a company does well, the price of its shares may go up. We call this a valuation uplift. However, if the company faces financial trouble, your liability is generally limited to the amount you invested. Investing in ordinary shares is high risk because there is no guarantee you will see a return on your investment. However, they also provide an opportunity to make a significant return on investment in the companies that do well. This is why diversifying your portfolio is important.
In the case of property deals, ordinary shares are typically offered at the beginning of a development project. The funds raised are most often used to acquire a property. This investment option carries higher risk but offers the prospect of higher returns upon project completion than preferred equity and first mortgage fund fixed income investments later in the development lifecycle (or property capital stack).
You can learn more about the property capital stack and different property development stages here.
Convertible Notes
These deal types apply to ventures and are generally aimed at wholesale investors.
Convertible notes are a popular tool used in startup financing. They are a unique type of investment that combines elements of debt and equity. Imagine you're an entrepreneur starting a new business, and you need funding to get things off the ground. Instead of seeking traditional loans or selling shares right away, you might consider issuing convertible notes to investors.
These notes are like IOUs that you issue to investors, promising to pay back the borrowed money with interest at a later date. However, what makes them enticing is that the investors have the option to convert their debt-equity into ownership shares (ordinary equity) in a company when certain conditions are met.
For example, if a company later raises a significant amount of money in a subsequent funding round or gets acquired by another company, the investors can choose to convert their notes into shares, typically at a significant discount. This provides flexibility for both the company and investors, as it allows founders to secure funding without immediately determining the value of their company and diluting ownership, and it gives investors the potential to benefit from future success.
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If the conversion doesn't happen, the notes will be repaid in cash at the maturity date. Overall, convertible notes offer a way for startups and investors to navigate the uncertainties of early-stage funding while keeping future equity potential in mind.
Preference Shares (Also referred to as Preference Notes and Coupons)
These deal types apply to both ventures and property, and are generally aimed at wholesale investors.
In the world of private equity investing, preference shares play a special role. They offer certain perks that investors find appealing. Think of preference shares as a way to enjoy the best of both worlds: stability and priority. When you own preference shares, you're like a VIP investor. You get first dibs on dividends or interest payments, ensuring a steady income stream that you can rely on. It's like getting your share of the profits before others. And if the company ever goes through tough times and has to sell its assets, you'll be among the first to get your investment back.
However, it's important to know that preference shares often come with some trade-offs. Unlike regular shares, you might not have much say in the company's decisions. Your voting rights might be limited, which means you have less influence. While preference shares offer stability, they may not have the same potential for big price jumps as regular shares. But here's the interesting part: in some cases, preference shares can be converted into regular shares, which gives you the chance to benefit from the company’s capital upside. It's like having a special pass that can unlock even greater rewards.
So, if you're considering private equity investing, preference shares can be a way to balance stability and potential upside. They offer a predictable income and a higher priority in getting paid back, which is like having a safety net. And, with the option to convert them into regular shares, you might be able to join in on the company's exciting growth journey.
When it comes to property development investing, preference shares offer some unique advantages.
With preference shares, you can enjoy fixed returns, just like receiving regular rental income. You'll have priority when it comes to getting your investment funds back and any accumulated returns if the property is sold or generates profits. This protects your investment and gives you a higher chance of recouping your money. Plus, preference shares can come with added safeguards, reducing the risks associated with property development.
While you may have limited voting rights, your focus is on receiving your fixed returns, aligning with the project's timeline and milestones. Preference shares provide stability, protection, and a clear exit strategy for property development investments.
First Mortgage Fund
This deal type applies to property and is generally aimed at wholesale investors.
A First Mortgage Fund is an investment option in property that focuses on lending money secured by first mortgages on real estate properties. When you invest in a First Mortgage Fund, your money is used to provide loans for property-related purposes, like buying or developing properties.
The loans are secured by a first mortgage, which means that if the borrower defaults, the fund has the first claim on the property. This helps to reduce the risk for investors. You earn income through interest payments made by the borrower, providing a steady stream of returns. At VentureCrowd these are typically paid monthly in arrears.
First Mortgage Funds are managed by our team who set loan terms and monitor the loan portfolio. They offer a less risky option than equity or preference shares for investors who want to break into the property market. And generally, that means the returns are lower also, but they provide another diversification spoke in the investment wheel.
Investments in VentureCrowd funds
These deal types apply to both ventures and property and are generally aimed at wholesale investors.
If VentureCrowd offers a deal directly, whether property or venture-related, it’s offered as an investment in a corporate fund. Investors pool their investments under the fund, and the fund manages the investment on their behalf.
At VentureCrowd we currently have investment funds for HealthTech and for VentureCrowd property deals. Investors in specific focus area funds like the HealthTech Fund can benefit from diversified early-stage investments selected by a highly-knowledgeable investment committee and soon, the Vest HealthTech Fund community. The benefit for investors is that they can set and forget with potential returns on offer when a company within the fund’s portfolio exists, or a property project reaches completion.
Investment in funds offers yet another diversification option for investors, and by making these types of investments available through crowdfunding, we’re enabling a wider range of investors to benefit from the different diversification options.
What deal types appeal to you?
Whatever deal types you choose to invest in, it’s important to seek professional financial advice in relation to your individual circumstances.
If you’re new to investing and you want to know more, read our articles on investing on our blog and if you’re ready to explore your investment options with VentureCrowd, book a call with one of our friendly team members today to discuss your diversification strategy.