What is EquityZen and how does it work?
EquityZen is a platform established in 2013 that simplifies the process of buying and selling shares in private companies. It operates a marketplace where investors and shareholders can come together, offering liquidity to early shareholders and access to private markets for accredited investors. This is primarily done through EquityZen funds, which are special purpose investment vehicles either owning shares of single or multiple companies.
To invest on EquityZen, individuals must first verify their status as an Accredited Investor, in accordance with the SEC's definition. Following verification, investors can browse companies and indicate their interest in single-company or multi-company investment offerings. EquityZen notifies investors when shares matching their interest become available. The platform requires investors to keep their demand updated and reconfirm it for offerings to be launched. New deals are introduced on Tuesdays and Thursdays at 12pm Eastern Time, and interested investors can then review offering details, make a reservation, and complete the necessary investment paperwork.
Investment opportunities on EquityZen include single company investments, where investors become limited partners in a fund that owns shares of a single company, and multi-company investments, where a single investment provides exposure to multiple companies through an EquityZen fund. Additionally, EquityZen offers direct share acquisition opportunities, giving investors direct share ownership and cap table access, though this option requires a higher transaction minimum and entails the investor managing ongoing interactions with the company. EquityZen emphasizes that all transactions occur via company-approved share transfers, ensuring a structured and secure investment process.
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How risky is EquityZen?
4/5— High Risk
Investing in private companies through platforms like EquityZen involves several risks, including but not limited to:
1. Liquidity Risk: Investments in private markets are inherently less liquid than public markets. It can be challenging to sell or exit the investment quickly without potentially incurring a significant loss.
2. Market Risk: The value of investments can fluctuate due to changes in the market conditions. Private companies' valuations are subject to market demand, sector performance, and broader economic factors, which can lead to volatility in investment value.
3. Company Performance Risk: Investing in private companies carries the risk associated with the company's performance, including financial health, management decisions, and market position. There's no guarantee of success for any given company, and investments can lose value if the company underperforms.
4. Regulatory Risk: Changes in regulations or the legal environment can impact the ability to sell or manage investments. Accredited investor criteria, securities law, and tax laws affecting private investments can change, impacting investment outcomes.
5. Information Asymmetry: Private companies are not subject to the same disclosure requirements as publicly traded companies. This can result in less information available to investors about the company's financial situation and prospects, making it more difficult to make informed investment decisions.
6. Concentration Risk: Investors focusing on a single or a small number of investments may face higher risks due to lack of diversification. If one investment performs poorly, it can significantly impact the overall investment portfolio.
How liquid is EquityZen?
1/5— Minimum Liquidity
EquityZen facilitates liquidity exclusively for vested shares, meaning that it does not offer liquidity options for unvested shares, unvested Restricted Stock Units (RSUs), or options directly.
However, if options are vested, EquityZen can provide liquidity in conjunction with the exercise of those vested options.
For RSUs or any other form of equity, these must be converted into common or preferred shares that are fully vested and owned by the individual before any transactions can occur on the EquityZen platform.
The platform emphasizes that restrictions typically apply to the transfer or sale of non-public stock, which can vary based on the issuer and the holder's specific circumstances.
How volatile is EquityZen?
3/5— Moderate Volatility
The assets available on platforms like EquityZen, which consist of shares in private companies, can exhibit higher volatility compared to publicly traded stocks. This volatility stems from several factors:
1. Limited Public Information: Private companies are not required to disclose as much information as publicly traded companies, making it harder for investors to assess the company's true value and future prospects. This uncertainty can lead to more significant price swings as new information becomes available.
2. Market Conditions: The valuation of private companies can be highly sensitive to overall market conditions, investor sentiment, and industry trends. Shifts in these areas can cause rapid and substantial changes in valuation.
3. Liquidity: The lack of a public trading market for private shares means that buying and selling positions can be challenging, contributing to price volatility as offers may vary widely based on demand and supply dynamics at any given time.
4. Company-Specific Events: Developments specific to a private company, such as achieving significant milestones, fundraising rounds, or changes in leadership, can significantly impact the company's perceived value and, consequently, the valuation of its shares on platforms like EquityZen.
What is the average rate of return for EquityZen?
N/P— Not Predictable Return
The returns an investor can expect from investing in private companies through platforms like EquityZen vary widely and depend on several factors, including the performance of the individual company, the timing of the investment, market conditions, and the exit strategy (e.g., the company going public or being acquired).
Unlike traditional stock investments in public markets with more predictable patterns and historical data, private company investments are inherently riskier and less predictable.
Due to these variables, it's difficult to specify a standard return rate for investments made through EquityZen. Investors should approach these investments with a clear understanding of the risks involved and the possibility that the investment could result in significant gains, no return, or a loss of principal.
What is the minimum investment amount for EquityZen?
The minimum investment size for investors is set at $10,000.
However, this minimum amount may not apply to all offerings available on the platform. For specific offerings, potential investors are encouraged to refer to the individual fund offering documents for detailed information regarding minimum investment requirements.
What is the investment time horizon for EquityZen?
The time horizon for investments made through EquityZen can be indefinite, as not all companies will proceed to an Initial Public Offering (IPO) or be acquired. If a company does go public, EquityZen can transfer the shares to an investor's brokerage account, allowing the investor to hold or sell the shares according to their preference. However, it's important to note that EquityZen cannot guarantee an exit or a specific timeline for when a company may go public or get acquired.
The majority of investment opportunities on EquityZen involve companies that have received late-stage or growth funding, with institutional investors typically having an investment horizon of 2-5 years.
Who can invest in EquityZen?
To invest in offerings through an EquityZen fund, individuals must meet the criteria to be considered an Accredited Investor according to the Securities and Exchange Commission (SEC) definition.
EquityZen's private offerings are exclusively available to accredited investors, and the platform does not extend investment opportunities to non-accredited investors, unlike some platforms that may offer investment options under regulations like the JOBS Act's Reg. A+ or Reg. CF.
Is EquityZen regulated or audited?
EquityZen operates under regulatory oversight as its broker/dealer entity is registered with the U.S. Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).
This registration and membership indicate that EquityZen adheres to the regulatory standards and practices required for broker/dealers, including compliance with financial reporting, conduct, and investor protection standards.
Being a FINRA/SIPC member firm also means that EquityZen undergoes regular audits and is subject to the rules and regulations designed to protect investors.
Is EquityZen insured?
EquityZen is a member firm of FINRA/SIPC.
Membership in the Securities Investor Protection Corporation (SIPC) provides a certain level of insurance to clients' accounts, offering protection up to $500,000 (including $250,000 for claims for cash) in the case of a brokerage firm's failure, though it does not protect against the loss of market value of securities.
Does EquityZen distribute payouts?
No Recurring Payouts
Investing in private companies through platforms like EquityZen generally does not involve receiving dividends.
Private companies, especially those in growth stages, typically reinvest any profits back into the company to fuel further growth, rather than distributing them as dividends to shareholders.
This means that the primary potential for return on investment comes from the appreciation in the value of the shares, which could be realized if the company goes public (through an IPO) or gets acquired at a valuation higher than when the investment was made.
Therefore, investors should not expect regular dividend payments as part of their investment returns in private companies on EquityZen.
What are the annual fees for EquityZen?
EquityZen involves different fees at various stages of the investment process:
1. Selling Fees: Sellers are typically charged a 5% fee by EquityZen when a transaction closes.
2. Investment Fees: Investors incur a one-time sales fee, which varies based on the investment size. Investments up to $500,000 are subject to a 5% fee; between $500,000 and $1 million, the fee is 4%; and for investments of $1 million and above, the fee is 3%.
EquityZen generally does not charge carried interest or a recurring management fee on non-actively managed funds.
How do I handle my investments in EquityZen?
On EquityZen, investors can actively manage their assets in several ways:
1. Reserve Investments and Indicate Interest: Investors can browse live offerings or indicate interest in upcoming ones by reviewing companies, their offering documents, and conducting research to make informed decisions.
2. Receive Personalized Updates: By actively managing investments, investors get personalized updates on the companies within their portfolio, keeping them informed of any significant developments.
3. Exit Options: Investors have the opportunity to receive investment proceeds either in the form of shares or cash, depending on whether the company experiences a successful exit (e.g., IPO, acquisition) or if they choose to sell their position.
The "Investments page" on EquityZen serves as a personalized dashboard, offering a curated list of companies and opportunities based on the investor's preferences, previous investments, and other demographic or categorical information. This feature aims to match investors with the most relevant investment opportunities while providing insights into the pre-IPO tech space and popular trends among platform users.
How does EquityZen get taxed?
EquityZen provides tax reporting support to investors primarily through the issuance of a Schedule K-1, but only when there is a taxable event such as a change of control or distribution of exit proceeds during the tax year. If no such event occurs, no K-1 will be issued for that fund. The tax treatment of transactions is vetted by outside tax attorneys, and EquityZen includes their memo in the documentation provided to investors.
Upon investing, individuals sign a Subscription Agreement to purchase an interest in a fund (company) and complete a W-9 form (or W8-BEN for foreign investors) for EquityZen's records. Investors receive annual tax documents, including a Schedule K-1 that updates them on their investment status, with all legal and financial documents prepared with the involvement of outside counsel or accountants as needed.
Additionally, investors receive formal legal documents, such as Subscription and LLC Agreements, indicating their membership in the fund, along with closing documents from EquityZen detailing the specifics of their investment.
How many investors are on EquityZen?
EquityZen has amassed over 650,000 total subscribers and has served more than 450 companies. The platform has successfully closed over 40,000 transactions, with the total value of these transactions exceeding $2 billion.
Who is the CEO of EquityZen?
The CEO and a founder of EquityZen is Atish Davda, who has a background in quantitative analysis and brings a wealth of experience from founding, operating, fundraising, and leading multiple start-ups.
Phil Haslett is also a founder of EquityZen and serves as the Chief Strategy Officer, where he draws on over 10 years of experience in developing and scaling the pre-IPO investment platform, overseeing its strategic direction, partnerships, and operations.