{"id":183069,"date":"2023-09-20T02:16:06","date_gmt":"2023-09-20T01:16:06","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=183069"},"modified":"2025-07-02T00:37:33","modified_gmt":"2025-07-01T23:37:33","slug":"startup-equity-financing-investor-perspectives","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/startup-equity-financing-investor-perspectives\/","title":{"rendered":"Startup Equity Financing: Investor Perspectives"},"content":{"rendered":"\n

You may be someone interested in investing in startup shares. Alternatively, you may be a startup founder who wants to gain insights into investors\u2019 considerations when making startup investment decisions. The general goal of investing in startup equity is to get an early foothold in a successful venture. At the same time, startup equity investors should minimise the risk that comes with investing in startups, which are inherently risky. This article will consider investor perspectives in startup equity financing<\/a>. <\/p>\n\n\n\n

Maximising Upside Potential and Minimising Downside Risk <\/h2>\n\n\n\n

Startup investors commonly speak in terms of upside potential\/downside risk when it comes to equity financing.<\/p>\n\n\n\n

Upside refers to the potential to share in a profitable business\u2019s future growth. This commonly means obtaining shares for a discount price relative to future equity financings. You as an investor may then sell your shares if the business is purchased or goes public. If you are a successful startup investor, you can turn \u00a31m to \u00a3100m. This is provided you invest in the right startup. <\/p>\n\n\n\n

However, the vast majority of startups fail to achieve their growth targets. This either leads to massive devaluations in price or the outright failure of the business. Should this occur, in the absence of downside protection, you are likely to lose some or all of your investment. <\/p>\n\n\n\n

Case Study <\/h2>\n\n\n\n

Consider the following scenario. <\/p>\n\n\n\n

WeCo Ltd: Different Perspectives <\/h3>\n\n\n\n

You have identified WeCo Ltd as an investment opportunity. WeCo intends to raise \u00a31m in seed funding. The company plans to conduct three more financing rounds before it goes public in seven years. <\/p>\n\n\n\n

Based on your modelling, you determine that if WeCo hits its growth targets, your investment will be worth \u00a350m at the point of an IPO. <\/p>\n\n\n\n

However, a more pragmatic model suggests that the company may not hit its valuation targets. Instead, its pre-IPO valuation may be closer to \u00a325m. <\/p>\n\n\n\n

More cynical models suggest that if WeCo fails to develop its product within the next three years, it will struggle to achieve more than \u00a310m in valuation. In this case, it is unlikely to go public. Accordingly, you would write down the value of the company as \u00a38m.\u00a0<\/p>\n\n\n\n

The most negative forecasts would be where it fails to develop the product at all. This would essentially write off the value of investments to less than \u00a31m. <\/p>\n\n\n\n

Downside Exposure<\/h3>\n\n\n\n

If you exchange \u00a31m for just ordinary shares, you obviously stand to grow your capital considerably if the business meets its targets. But the pessimistic forecasts would either see your investment grow at sub-par rates or be written off entirely. <\/p>\n\n\n\n

In all cases, achieving a return on your investment requires the startup to achieve a measure of success up to seven years in the future. You are unlikely to unlock any value in your investment until then. This is because startups rarely pay dividends to ordinary shareholders. Nor are you likely to find a willing buyer of your existing shares at a competitive price until the IPO. <\/p>\n\n\n\n

As you can hopefully see, your downside exposure is intolerably high, at least at an initial investment of \u00a31m. In an ideal world, you should be able to achieve some combination of the following objectives:<\/p>\n\n\n\n