Invest in startups | Equity 101 Course

Who can invest in startups?

Private company shares are different from public shares you buy in the stock market. Learn how and why people can invest in startups.

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Video transcript

There’s no one right way to build your financial future. If you had talked to me a decade ago and asked me, “How do you invest in startups?” I would’ve said that you probably have to have an amazing network, you have to have gone to certain schools.

Well, guess what? I’m a normal person with a normal job. And I’m proud to say that I am a startup investor. So today we’re going to demystify the whole process of investing in startups. You just need to know who can invest and how you do it. So let’s get started.

The big thing to know is that private company shares are super different from public company shares like the kind that you would buy on the stock market. Public company shares are registered with the Securities and Exchange Commission, which is a federal agency. And if that sounds serious, it is. This means that public companies have to report their financials and a whole range of other information that would be material to a buyer or seller of the shares.

So if you’re looking for information about public companies, you can find that information pretty easily on the internet. You can find their quarterly earnings, their annual earnings, and all of this information is intended to do one thing: Protect shareholders.

So if you own shares of a public company, or if you’re thinking about buying shares of let’s say Google or Apple, you have access to all of their financial information at any time.

But with private companies, it’s way different. A private company doesn’t have to release any of that information to the public. So what does that mean? It means that in private companies comes with a lot less information—and as a result, a lot more risk.

So in order to invest in a private company like a startup, you have to meet some special criteria. We’re going to talk about those criteria.

There are accredited investors and there are qualified purchasers. Both of these are terms that are set by the Securities and Exchange Commission. They mean that you have to have a certain level of financial sophistication which allows you to purchase securities that are not registered with the SEC.

So in other words, if you are one of these two things—an accredited investor or a qualified purchaser—then you are legally qualified to take on the additional risk of investing in private companies.

So what’s the difference between an accredited investor and a qualified purchaser? Well, an accredited investor is typically more relevant to individuals. It means that you, as an individual, meet certain lifestyle and educational criteria, like your income, your net worth, or your education. Whereas a qualified purchaser is usually more relevant for funds, institutional investors, family offices, or companies.

So let’s talk about the criteria for each one. What is an accredited investor? This is someone who meets a specific set of criteria pertaining to their assets, their education, and their lifestyle.

Let’s talk specifics. So if Iris wants to be an accredited investor, she has to tick at least one of these boxes. As of today, as an individual, Iris has to have earned income of at least $200,000 per year for the last two years.

Another way Iris can become accredited is through her net worth. So she or her family will qualify if they have a net worth of over a million dollars. But this cannot include her primary residence.

So those are two of the three pathways towards accreditation. But if Iris doesn’t meet either of these criteria, she can still become an accredited investor by passing a financial exam and holding a specific license, like a Series 7, a Series 82, or a Series 65.

The big thing to take away, becoming an accredited investor is typically all about meeting certain metrics for your assets in your everyday life.

So, there are many different types of investors who are qualified to invest in startups. We just talked about accredited investors.

Now, you can imagine that if the road to becoming an accredited investor means you have to make a good bit of money, have a high net worth, or pass a financial exam, the road to becoming a qualified purchaser is even harder.

A qualified purchaser is an entity—could be an individual, a family office, a business, an endowment, a foundation, or a pension—that has a significant amount of capital.

So if we’re talking about an individual like Iris or a family office, if they have five million dollars of investable capital, they would qualify as a qualified purchaser.

The upside to investing in startups, once you’re able to do it, is not only can the startup have a huge return for you as an individual or as an entity—you can also help create jobs, create new technology, et cetera.

And at the end of the day, if you want to invest in startups, the SEC wants to make sure that you’re able to take that risk on. Say you were one of the early investors in Amazon or Google before the company went public.