Wednesday, July 22, 2009

Startup Investing

It's not easy to invest in startups, at least not the ones that you would like to invest in (i.e., non-shady ones with a chance of generating big returns). Startup investing is for the stouthearted. But even if an individual has the stomach, she might find her money not wanted due to competition from larger investors. BusinessWeek offered some tips to get in on early stage companies, if you're so inclined.

1. Do you qualify as an "accredited investor" under the current SEC definition?

2. Do you have reliable information about the company's finances?

3. Can you gain entrée through personal connections to the company, its existing investors, or its board? Do you work in the same field as the company, which could make you a more attractive investor?

4. Have current shareholders listed to sell on one of the secondary market platforms?

One of the hurdles for a mass affluent investor to overcome is the requirement to be an accredited investor.
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;

a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;
The accredited investor rule comes straight from the Securities Act of 1933. From what I can tell, the dollar amounts haven't been adjusted since 1982.

One of the illiquid securities exchanges mentioned in the article, SharesPost, promotes having access to sellers of Facebook shares. You don't necessarily have to be a Russian billionaire to buy into the Facebook party.