March 5, 2020

Offering Types 101

 

As you start digging deeper into the equity crowdfunding world, you’ve probably run into some interesting companies that you want to and are ready to invest in. As you pore over the details, you run into a term: SAFE. You might already understand common stock or preferred shares, but SAFE? What am I to fear? We’re here to help you overcome the myriad of offering types out there so you can invest confidently in whichever company you want.

 

Offering Types

We’ll note right off the bat that equity offerings are the most common type of securities issued in the startup ecosystem. 

 

Common Stock: A security that represents ownership in a company. Holding common stock generally grants holders the ability to elect board directors and vote on corporate policies. In exchange for higher rates of return, common stockholders have the rights to a company’s assets only after bondholders, preferred shareholders, and debtholders are paid in full. 

 

Preferred Stock: Much like common stock, except preferred stock has priority over common stock when it comes to dividends and preferred stockholders claim on assets is greater than common stockholders, but still less than bondholders in the event of a liquidation. Preferred stockholders usually have no or limited voting rights in corporate governance. 

 

Debt: An amount of money borrowed by one party from another. Debt allows companies and individuals the ability to make large purchases they normally could not. In debt arrangements, the borrower gets permission to borrow money under the condition that the amount be paid in full at a later date, normally with interest. 

 

Convertible Note: A form of short-term debt that converts to equity at some point in the future, normally in conjunction with a future financing round. Convertible notes are a very popular form of funding for startups because it delays putting a hard number on the value of a startup.

 

CAFES: Contract and Future Equity Stake (CAFES) are simply SAFEs used on the platform Razitall. We haven’t seen too many startups besides those raising on Razitall use CAFES, so for now we believe it is Razitall’s equivalent of a SAFE. 

 

SAFE: Simple Agreement for Future Equity (SAFEs) are a form of funding that gives investors the right to purchase stock in a future priced equity round of financing. The SAFE is an offering type meant to be a simpler alternative to convertible notes, but is not a loan. The SAFE is also a cheaper contract to produce contract than other offering types.

 

Revenue Shares: Revenue shares are debt security offerings that provide lenders recurring payments based on the company’s financial performance. Companies can offer a set percentage of sales/revenue or a net profit metric to use as an interest payment to lenders on a quarterly or annual basis until a set return is met. Revenue shares are generally seen attached to restaurants and other similar businesses raising online.

 

Interest Purchase Agreements (IPA): A simple agreement to acquire membership units of a limited liability company (LLC) that gives holders a profit and voting interest in said LLCs. 

 

We believe these are the majority of offering types you’ll encounter as you dig deeper into the world of equity crowdfunding. If you believe we missed one or there’s one we didn’t cover in this list, feel free to reach out at hello@kingscrowd.com

 

As a platform and company involved in the nascent online private markets, our ethos is to provide access to the best analysis and research for everyone. We want and need to educate everyone about the growing popularity of equity crowdfunding and the differences between Reg CF, Reg A+, what an angel is, what qualifies as an accredited investor, and more. If interested, signup for KingsCrowd here to find institutional grade, unbiased research and ratings for startups raising on the online private markets for accredited and non-accredited investors. 


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About: Francis vu

An investment professional with a background in private equity and venture capital having spent time conducting investments at VU Venture Partners and Pacific Oak LLC with a finance and management degree from Tulane University.

View Francis vu's articles

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