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Passive investing generates income that requires little or no effort to earn, maintain and grow that income. Passive investing examples include dividends from dividend stocks, 401(k), Roth IRA, interest from high yield savings account and dividends from REITs. Learn more about what are passive investments, different types of passive investments and how to get started.

How to Invest in Startups

04.15.2019 by admin // 5 Comments

Invest in startups: Room full of people with a whiteboard that says startup day

Recently Lyft went public and Uber filed their IPO. There is finally an opportunity for the average investor to start investing in some of the tech unicorns. With this comes the news about the original investors and how much money they stand to make in the IPO. You begin to think wow, I wish I invested then. When Snap went public, one high school invested $15,000 and made millions. There are also stories about startup investors that lost it all. The most public recent example of course is the investors that lost money in Theranos. Whether or not this type of alternative investment will appeal to you will depend on your risk level. Wondering how to invest in startups? Before you make you make your first investment, start by doing your research and learn how to find your first investment opportunity.

Why Invest In Startups?

According to Fortune, while the number of U.S companies continues to grow, the number of U.S. companies that are traded on stock exchanges has plunged 45% since peaking 20 years ago. Additionally, new companies have been completely disrupting traditional business models but many of these companies aren’t yet public. If you only invest in public companies, you are limiting your investment options more so than previous generations.

What Startups Can You Invest In and How Much

First, understand what startups you can invest in and how much are you willing to invest. Certain investments are only open to accredited investors and you’ll want to understand if you qualify before doing research on companies you’re unable to invest in. If you’re not an accredited investor, you’ll want to look further into crowdfunding.

You’ll also have limits based on how much you want to invest. Startups will have different requirements but in general, the later the stage the easier it is to get priced out. Additionally, you need to be comfortable with a lack of liquidity and that you may lose your entire investment. When you invest in the stock market, you can sell any time you want. When you invest in a private company though, you can only sell when the startup provides you the option to do so.

Startup Stages of Financing

Seed funding is the first official round of financing. There are many potential investors at this stage and can range from the founders, friends, family to accredited investors. Typically, this is the easiest time to invest in a startup but it’s also the riskiest. Companies are typically just starting out and they’ll have no proven track record. After raising capital at this stage, a company may decide to pursue a Series A.

For more details on each stage here are two helpful articles:

How to Value a Startup

Investopedia talks here about methodology to use to value a private company. There is a lack of strict reporting requirements for private companies, making it harder to value. If you’re investing in a seed round though, there may be no historical numbers to even look at yet. When you’re meeting with the founder, review their pro forma. Ask a lot of questions about their business plan, about the market and what their exit strategy is. If the business doesn’t have a track record yet, does one of the founders have a history with building businesses from the ground up?

Investing in Startups Negotiation: What Should You Get For Your Investment

When I’ve invested in startups, I’ve yet to encounter a “Shark Tank” like scenario and have always been told this is what they are offering. One company decided not to bootstrap and instead raise initial funding from friends and family. In that case they offered the same deal to everyone – a certain amount of money (say $5,000) equaled a certain percentage of the company. In other cases, the company bootstrapped for a little and then offered a SAFE (simple agreement for future equity) by Y Combinator. With this, founders are able to calculate how much ownership has been sold and investors know how much ownership of the company they have purchased. Understand that if / when the company raises more money your ownership will be diluted.

Where to Find Opportunities to Invest in Startups

The easiest way to find opportunities to invest in startups is to look to your own network. If you know friends that have invested in startups before, ask for introductions. Check your LinkedIn and other social media to see if anyone recently started their own business. Do you have connections that are more likely to know entrepreneurs? For example, everyone has that friend that seems to know everyone. Doctors are known to have high salaries and may have been asked to invest in startups. Do you have any connections that started a Kickstarter to raise money for a business idea – perhaps they will entertain the idea of having an equity partner if you reach out.

There are limitations to advertising that a startup is raising money, so it’s likely you already know people who are raising money, they just haven’t publicly mentioned it. It’s up to you to reach out and let people know you’re interested in investing.

Have you invested in a startup? How did you get started?

The Ultimate Guide To Employee Stock Purchase Plan (ESPP)

01.27.2019 by admin // Leave a Comment

Why You Should Enroll in an employee stock purchase plan

Why do you care about Employee Stock Purchase Plans (ESPP)? If you enroll in the employee stock purchase plan offered by your company you can make more money! ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.5% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

If you’re considering enrolling in ESPP here are the terms you should know, the benefits of ESPP and approximately how much extra income you may be able to make.

Employee Stock Purchase Plan Terms To Know

ESPP Enrollment Period: defined set of dates where you can sign up to participate and select the % election amount. If you miss this enrollment period you will have to wait for the next enrollment period (either 6 months or 1 year later depending on the terms)
ESPP Purchase Period: Timeframe in which company shares are purchased on your behalf through payroll deductions. There may be two purchase periods a year, one beginning Jan 1^st and ending on June 30^th, with the second starting July 1^st and ending Dec 31^st. You do not have access to the money you’ve contributed during this time.
ESPP Purchase Price: Usually, the purchase price is the price of the stock on the last day of the offering period, with the discounted rate applied. In the example above, it would be the ending stock price on June 30^th and December 31^st.
ESPP Holding Period: You can sell your ESPP shares at any time, even the same day you get the shares. However, in order for the sale to be taxed as a capital gain it must be considered a qualifying disposition.
ESPP Qualifying Disposition: A qualifying disposition refers to a sale, transfer or exchange of stock that qualifies for favorable tax treatment. ESPP falls within this definition. To be a qualifying disposition, the employee must sell their position at least one year after exercising the stock or two years after the beginning of the ESPP offering period. As long as you hold your ESPP shares for this time period you are taxed at a capital gains rate. If you sell prior to this period, it is considered a disqualifying disposition. A disqualifying disposition is taxed at the income tax rate.

Employee Stock Purchase Plan IRS Limits

The IRS imposes a limit of a maximum market value of $25,000 per year. However, companies can decide to impose lower limits. That means if your company grants you shares at a 15% discount, the max you can contribute is $21,250. The purchase discount also tops out at 15%, but your company could choose to offer less than that as well. Every plan can vary so be sure to look into the details around what plan your company offers.

Employee Stock Purchase Plan Tax Rules

The stock discount price (up to 15%) is considered additional compensation and taxed as ordinary income. If you sell that day, it is disqualifying and will be taxed as a short term gain / ordinary income. If you hold shares for at least 2 years from the first day of the offering period and at least one year from the purchase date, the additional income is considered a “qualifying dispositioned” and will be taxed as a long-term capital gain (15% tax rate for most taxpayers).

Additional Income Earned with Employee Stock Purchase Plan

The tables below offer a guide to how much additional income you can make after taxes if you sell that day per year. If you decide to hold onto the stock for the time period outlined below, your taxes will be 15% (for most taxpayers) for the discounted amount + any gains you made while holding the stock. Remember, it is always possible for the stock to lose value.

Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for single tax filers — *1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket

It’s hardest to maximize the program when you make less money, but that’s when this is actually the most valuable! When your tax rate is only 22%, you could make almost $2,500 after taxes. If you’re in the highest tax bracket you make only $2,000 after taxes. The first purchase period is always the toughest. You’re used to getting that money in your paychecks every pay period. After the first purchase period is done, if you sell all your shares immediately you have everything you’ve invested from the past 6 months plus the additional income you made as soon as the sale settles!

If you work for a public company, check out your internal benefits page and see if this is one of the benefits your company offers!

Legalized Equity Crowdfunding: What to Know

01.20.2019 by admin // Leave a Comment

So you want to invest in private companies but you aren’t an accredited investor quite yet? Title III of the JOBS Act, passed in 2012, created an opportunity for the average investor to invest in private companies. Regulation crowdfunding allows startups to raise up to $1,070,000 per year from both individual investors and accredited investors through registered funding portals.

There are still some limitations such as how much a person can invest in a 12 month period. These investment limits are inflation-adjusted.

If your annual income OR your net worth is less than $107,000, you can only invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth
If both your annual income AND net worth are equal to or more than $107,000 then you can invest up to 10% of your annual income or net worth, whichever is less, but not to exceed $107,000

If your annual income is $150,000 and your net worth is $200,000, the JOBS Act crowdfunding rules will let you invest up to $15,000 over a 12-month period. It is $15,000 and not $20,000 because your annual income is less than your net worth.

Generally there is a feeling that the limitations and regulations most companies still restrict investments from non-accredited investors, and the JOBS Act hasn’t had the impact intended. Mainly, companies don’t want to pay the associated costs and file all of the mandated disclosures when they can raise capital under Regulation D which is both easier and cheaper. However, there are some bright spots. Crowdfund Capital Investors wrote a report and found that while the market is still young, it is growing at a rapid pace and found a high success rate for offerings.

You can find all of the registered funding portals on the FINRA website here. FINRA also provides an overview of Crowdfunding and what Investors should know here.

Has anyone invested in private companies through these funding portals? What was your experience?