EquityZen offers an intriguing way for accredited investors to invest in late-stage, pre-IPO companies.
- Website: https://equityzen.com
- Investment Types: Startups/Business Financing
- Security Types: Equity
- Sectors: Big Data, ECommerce, Late-Stage, and Technology
- Minimum Investment: 20000
- Must be accredited
- 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
- Only open to accredited investors
- Relatively high minimum investment
- Startups (even later-stage ones) are high-risk, low liquidity investments
- Investments are not direct stock ownership (an SPE is used)
- EquityZen charges up to 5% of the amount invested
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. Investments are offered under SEC Reg D and available only to accredited investors
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.
EquityZen fee structure
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 and due diligence expectations
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 registred, investors can review company information, including detailed prior financing rounds and historic share price performance.
You may be able to invest in EquityZen using a Self-Directed IRA or 401K. To learn more about using a Self-Directed retirement account for alternative investments, visit our friends at Rocket Dollar.