How To Buy Shares in a Later Stage Company

By Matthew Milner, on Wednesday, September 25, 2013

The early bird catches the worm.

Not a bad proverb to live by. But as it relates to the world of early-stage investing, there’s not just one type of early bird — there are two.

The first type, the crack-of-dawn early bird, invests in start-ups that consist of a couple of engineers with a big idea on a napkin. High risk, high potential reward.

The second type is still an early bird, but before writing a check, this species hits the snooze button a few times. These snooze-button early birds are the investors waiting for an actual company to emerge from the napkin — a private enterprise that’s accumulated millions of users and millions in revenues.

This is still early-stage investing, but the risk/return profile is different: there’s less risk, and the potential returns might not be quite so high.

Today’s article is for the snooze-button early birds. Specifically, we’re going to look at a later-stage investment opportunity that’s just fabulous.

Fabulous!

Fab is an e-commerce success story. They reached $120 million in revenues in 2012, and they’re on target to hit $250 million this year.

Fab’s 14 million members are in 27 countries and have bought over 7 million products.

Reaching that level of growth didn’t come cheap. Fab has raised approximately $340 million from top-notch investors including First Round Capital and Andreessen Horowitz.

This summer, pricing their shares at about $7.50 each, Fab raised $150 million. That gave the company a valuation of $1 billion.

Even with that sky-high valuation, Fab was a popular deal. Professional investors were fighting to get in, and no angels made the cut. If Fab didn’t want to sell more stock, the rest of us were out of luck.

The Employee Discount

But what if an early employee of the company were willing to sell a few shares of their stock? And what if you could find it on one of the equity crowdfunding platforms?

Recently, we noticed that MicroVentures, one of the high-quality platforms we cover at Crowdability, was offering Fab stock. But when we looked into it more closely, we saw that it wasn’t priced at $7.50 a share. It was priced at $5.

Hmm. Why would there be a discount?

Here are two of the main reasons:

1. When investors wrote checks this summer for $150 million, they bought preferredstock. Preferred stock can have certain advantages over common stock.

For example, preferred holders can insist on being paid first in the event of a sale. Those advantage make it more expensive. The opportunity at MicroVentures is to acquire Fab’s common stock, hence the discount.

2. The Fab stock being sold likely comes from an employee. The price the employee paid for it was probably quite low — for early employees, shares are sometimes priced at just a penny or two.

By selling their shares at $5 each, not only can the employee generate a nice profit, but they can likely find many buyers.

Now that’s an employee discount that’s good for everyone!

Investing in Later-Stage Companies

This begs the question: is later-stage investing a good investment strategy?

Well, it’s certainly proven fruitful for some investors. One of the most prominent is Yuri Milner.

One of Yuri’s strategies has been to identify late-stage private companies of uncommon excellence — fast-growing companies that have already proven themselves, but still have the potential to grow into massive, world-changing entities — and to place huge bets on them.

In 2009, for example, he invested several hundred million dollars in Facebook. He’s also invested in such companies as Spotify, Airbnb, and Twitter.

Yuri typically buys common stock — the same type of stock that’s available for Fab — and make no mistake: he expects his strategy to yield big paydays. In the case of Facebook and others, he’s already done extremely well.

How Do You Make Money?  

But enough about other investors. How do you make money on a late-stage company?

Simply put, the same way you would with an earlier-stage company:

Hopefully, either the company goes public, or it’s acquired — in this case, by a huge company such as Amazon.

What’s the Catch?

Remember, later-stage investments are less risky — if a company already has $250 million in sales, it’s probably not going out of business tomorrow. But with lower risk comes lower potential reward. Later-stage investments rarely offer the chance to make, say, 100x your investment.

In case you’re interested, here’s some of the fine print of the Fab investment:

  • MicroVentures charges a 5% up-front fee and keeps 10% of the upside.
  • The minimum investment is $10,000.
  • Early-stage investing (and later-stage investing) is risky and comes with no guarantees.

(Please note: Crowdability has no official relationship with MicroVentures, and zero financial interest in MicroVentures or Fab.)

Also please note: not all late-stage companies end up dominating the world. Two of Yuri’s other investments, for example, included Zynga and Groupon. Both companies went public with a big splash, and perhaps Yuri made a good return on the IPO, but both are currently struggling.

To see the details of the Fab offering and to learn more, click here (you’ll need to register for free at MicroVentures to see the deal)

Best Regards,
Matthew Milner

Founder
Crowdability.com

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Tags: Equity Crowdfunding Crowdfunding MicroVentures Secondary Shares

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