Imagine waking up one morning, making a pot of coffee and checking your e-mail.
You quickly notice an e-mail from one of the start-ups you invested in...
Turns out it was just acquired—for $425 million!
Before you even finish the e-mail, you start dreaming of all the things you’ll do with your windfall:
You’ll pay off your bills, buy some gifts for your spouse and kids, go on vacation...
But then you finish skimming the note—and you’re shocked to see that you won’t be making a dime. Your investment has turned into a big, fat zero.
How on earth could this happen?
Good Technology, Bad Investment
To understand how you could lose money on a “winning” investment, it might be helpful to look at a recent article from The New York Times.
This story explores a once high-flying Silicon Valley start-up called Good Technology.
Good Technology provides mobile and software security solutions to corporations. The company was founded in 1995, and it’s raised more than $295 million from investors.
In 2014, the company generated $212 million in sales. In 2015, it was projected to gross nearly $250 million.
Things seemed to be going well—so when Good was offered $825 million in a takeover deal this past March, it reportedly rejected the offer as being "too low."
As it turned out, that was a mistake:
On September 4, 2015, Good Technology announced that BlackBerry, the mobile phone manufacturer, would be acquiring the company for just $425 million.
Hey, it’s not $825 million, but $425 million is still a lot of money—and many of Good’s early investors earned a tidy profit.
However, a large group of shareholders walked away with absolutely nothing.
Here’s what happened...
Which Would You "Prefer"?
A company generally has two types of stock: common stock and preferred stock.
Founders and employees—as well as uneducated investors—tend to receive common stock.
But sophisticated investors often insist on receiving “preferred” stock.
Preferred stock comes with special rights—including the right to get paid back first in the event of an acquisition, or to make a certain level of profits before other shareholders get a dime.
In the case of Good Technology, the rights of the preferred shareholders were very useful:
When BlackBerry stepped in to take over the company, the preferred shareholders were able to take their money (and profits) off the table first.
And this left common shareholders with nothing.
Private vs. Public Markets
It may sound like Good Technology did something “sneaky,” but that’s not the case.
What transpired with Good happens quite often. It’s normal.
It also highlights one of the many differences between investing in the public stock market and investing in the private market:
In the private market, not only do you need to evaluate the business, its product and its future prospects, but you also have to evaluate the terms of the investment itself.
For example:
What type of stock are you receiving? (As you just learned, if you’re not receiving Preferred shares, you could be putting yourself at financial risk.)
What’s the company’s “valuation”?
Do you have the right to invest in later financing rounds?
These investment terms may be unfamiliar to you, but they’re not difficult to understand—and it’s critical that you learn about them before you make an investment in an early-stage company.
Prepare Yourself Before May 16th
May 16th is just around the corner...
That’s when you and every other U.S. citizen will be able to start investing in private, early-stage companies.
You need to start preparing yourself now so you know what to look for when the private market opens up its doors.
You can get started by visiting Crowdability’s Resources page...
Or, you could take the extra step and enroll in our online course, The Early-Stage Playbook.
But what you can’t do is delay. Like Matt showed you yesterday, the public markets were flat last year, and they’re already showing significant weakness in 2016.
If you’re serious about growing your portfolio in the years to come, you need to start looking elsewhere.
Happy investing.
Best Regards,
Founder
Crowdability.com
