Minority or majority, that is the question
If you’re interested in equity investments, it’s of utmost importance that you understand the pros and cons of their different types. On numerous crowdfunding platforms, you’ll find projects raising money in exchange for equity or debt. Here in this blog post, we’ll talk about equity investments and leave debt crowdfunding for a later discussion.
Yes, a crowdfunding platform only makes it possible for you to buy a small part of the pie. But it still may give you a lot of rights and benefits to enjoy. These small investments from all the investors are usually accumulated in a special purpose vehicle (SPV), which basically is a company that is specifically created to consolidate the ownership and representation of a pool of minor investors in a project they have invested in. Your rights are fully represented and can be enforced in the company through the SPV or Lead investor which is the popular solution in majority of project published on CrowdedHero Platform
What it means
In a majority investment, the investors represented by an Lead investor or SPV acquire more than 50% of the company’s shares. It means that all together, you’re the new boss. In a minority equity investment, you and all the other investors — also represented altogether through an SPV — own a minority equity position (less than 50%) in the company.
Active investment management
As you have probably guessed, the majority investment gives you rights for an active involvement in the decision-making of the company. You can do a lot of awesome things:
- Make decisions about paying out dividends
- Ensure the professional management of the company, focusing on increasing its value
- Decide about possible consolidations with other companies in order to increase the market share of the company
- Work out a development strategy aimed at the creation of synergy value or disruptive and innovative products and services
- Structure and follow clear exit scenarios.
If you invest in equity through an online crowdfunding platform and the investment project is for purchasing the majority shares, your rights in the company are represented by an investment management team. As a representative of a crowd of shareholders, they can make changes to the existing company board, accept annual budgets and provide investors with transparent management and reporting.
Yes, the majority partner runs the company as they see fit. Minority investment in many cases doesn’t allow for this. However, if the actual management team of the company proves to be capable and devoted to the success of the business, investing in a minority equity — for a small investor — doesn’t feel very different from a majority equity investment.
Fine print considerations
In real life, however, it doesn’t always happen as described above. Majority shareholders don’t always start actively managing the company themselves, as to do so demands a lot of resources, knowledge and dedication. And minority shareholders are not always voiceless. The terms of the sale of shares are always subject to negotiations between the parties before they are fixed in the shareholders’ agreement — the document regulating relationships between the investor and the existing company owners. It may help to achieve results which could not be achieved otherwise. For example, it can include an obligation for the board to pay out dividends to shareholders, starting from year two after the investment. Or an obligation to accept exit proposals starting from year four and beyond. These are the clauses that CrowdedHero focuses on when negotiating the terms with an investment project.
How CrowdedHero does it
As the extensive experience of CrowdedHero’s team indicates, it’s very important to put down the strategy for each of the business projects offered for investment long before the fundraising campaign. It means that the terms of the shareholder agreement, be it minority or majority equity investment, the vision for the company’s development and for enhancing its value, and possible exit strategies are all being tailored to this specific company and investment type and mapped out in advance.
Therefore, by investing in minority equity via CrowdedHero, you can also be sure that — via an Lead investor or SPV — you still enter the council controlling the board’s operational activities on a daily basis. You can rely on a strict shareholder agreement with a veto right on strategic decisions, such as:
- Changes in the management board
- Any merging and/or acquisition activities
- A company share capital increase or decrease
- Company liquidation or reorganization
- Changes to company core business activities.
So, no matter which path you choose, it’s important that you have confidence in how your investment is being looked after. And today CrowdedHero sets this bar real high for crowdfunding platforms.