- Venture
EquityZen Review -- invest in late-stage startups
EquityZen offers an intriguing way for accredited investors to invest in late-stage, pre-IPO companies.
EquityZen
- Investment Types: Venture
- Sectors: Big Data, ECommerce, Late-Stage, and Technology
- Minimum Investment: $10,000
- Must be accredited
Pros
- Wide selection of investments
- Companies are more mature, with proven operational history
- Potential for quicker liquidity event than earlier-stage companies
- No ongoing AUM fees or carried interest
Cons
- Relatively high minimum investment
- Investments are not direct stock ownership (an SPE is used)
- EquityZen charges up to 5% of the amount invested
- Startup investments are already inherently risky and illiquid, and additional uncertainty around cannabis industry adds to that risk
- Only open to accredited investors
Overview
This EquityZen Review will help you learn more about EquityZen's investment offerings, including how the alternative investments on EquityZen are structured, and what your potential returns might be. You can read more about the criteria we use to review investment platforms here.
EquityZen is not technically “crowdfunding”, but is an online alternative investment platform offering a secondary market to investors, advisers, and employees of startups who are looking to sell some or all of their stock. EquityZen matches sellers and buyers (although influenced heavily by the most recent financing round, the sale price is ultimately determined by the seller), and then coordinates all of the (substantial) paperwork and process associated with the transfer, which importantly is approved by the pre-IPO company itself. Investments are offered under SEC Reg D and available only to accredited investors
Is EquityZen legit?
Yes, EquityZen is “legit” in the sense that it is a legitimate, regulated business and a legitimate alternative investment opportunity for accredited investors.
EquityZen is among a growing crop of crowdfunding and online alternative investment platforms, most of which have launched in the wake of the 2012 JOBS Act.
Types of investments EquityZen offers
Investments are in late-stage companies, primarily tech businesses, including many that are household names (you must create an account and certify as an accredited investor to browse open offerings). In theory, given their operating history and track record, these companies are closer to IPO (or other liquidity event) than a typical startup investment.
What do you get when investing with EquityZen?
Although the seller is selling company stock, that stock is in turn held in special-purpose entity (SPE) LLC, and investors receive a membership interest in that LLC. If and when the company goes public, after a lockup period investors will receive actual shares in the company deposited into their brokerage account. During the life of the SPE, investors will receive an annual K1 for tax purposes.
How does EquityZen make money?
EquityZen charges a one-time fee when you invest, from 3-5% of the invested amount (which is charged on top of the investment amount, so for example if you were to invest $50,000, you would end up transferring $52,500 to EquityZen). There are no ongoing AUM fees or carried interest.
Potential returns and cashflow
Investments via EquityZen are high-risk investments in private companies. Most of the investments have no explicit expectation of payments, dividends, or other cash flow. Investments in private companies can lose some or all of their value. While some investors achieve excellent returns from startup investing, that is a rare outcome and requires substantial diversification over time combined with very careful investment selection.
Breadth of offerings on EquityZen
EquityZen typically has a broad selection of open investments, though availability is dependent on willing sellers of private shares (and on the approval of the company as well). As of this writing, there were 16 open investments (with several only offering a wait list) as well as more than 20 preview investments offering prospective investors the opportunity to express interest. The companies listed include well-known tech companies, many recognizable consumer brands.
Regulatory framework
EquityZen is a registered broker-dealer (you can review their entry via FINRA’s BrokerCheck service). Broker-dealers are subject to specific due-diligence requirements to ensure an investment is “suitable” for their registered customers, or they can face fines and civil action. (That does not of course provide any guarantees about investment return or performance!). Investments are offered via SEC Reg D, and are only available to accredited investors.
Once registered, investors can review company information, including detailed prior financing rounds and historic share price performance.
This review was first published on 24 March 2017.
Our Rating
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