29 July 2023
When investing in SMEs or startups, the potential return comes mainly from the sale at a higher valuation of the company's stake acquired or rather subscribed for in a capital increase in the offering. In fact, if the company has succeeded over the years in developing its business, the value of the stake will also be increased accordingly.
The difference between sale price and purchase price is called capital gain if positive (or capital loss if negative). The sale of the share to make a profit usually takes place no sooner than 2-3 years and can lead in the long run to even a very high return.
The secondary source of return is any profits that the company might share and distribute among its shareholders (so-called dividends). The payment of dividends is very rare in young companies whose primary goal is to accelerate growth also by reinvesting profits. In addition, for innovative startups there is a ban on the distribution of profits for the entire period of innovative startup status (60 months from the date of incorporation).
When investing in real estate projects, the return is predetermined and comes from the liquidation of shares by the company at the end of the real estate project in which one has invested. The project has a predetermined duration (generally 12 to 24 months) and also a predetermined return (generally 10% to 15% per year). This is a really optimal combination of timing and return; crowdfunding democratizes access to these large real estate transactions (usually reserved for professional investors) from small amounts of capital and without having expertise in the field. Projects are typically the construction or renovation of a property for the purpose of reselling it, and at the end of the project, the liquidation of one's share includes invested capital and return.
To sell (and thus liquidate) a stake in an SME or startup and thus make a potential profit, there are 3 options.
Finding a buyer independently is the most difficult route. The investor through his or her connections must find someone who is interested in buying (which can be very complicated in the absence of a secondary market) and 'agree on the purchase and sale price. ' Negotiation can be difficult because the value of the company is not always immediately identifiable in an objective way. Once an agreement is found, one can proceed with the transfer of the interest by contacting a notary or accountant. This step (as well as the associated cost) can be avoided by buying the share under the Alternative Regime or "Rubrication" (We elaborate on this topic in the fourth lesson of the Guide).
The most frequent case of sale that investors and companies often point to is the EXIT, which is when the company in which we have invested is sold to another company and we exit the corporate entity (EXIT), usually larger and interested in incorporating it into its business or an investment fund.
In this case there is a single buyer who makes a one-time purchase offer to all shareholders to buy the relevant shares.
In the case of exit, those who invested in equity crowdfunding have the right to associate themselves with the sale of the company they are a partner in on the same terms bargained for by the majority partners(co-sale right) where the sale of the entire company allows them to get the best price the market can offer by negotiating the price for the entire company (and not a minority share) and the price obtained is applied to all partners, even those with minority shares by applying precisely the co-sale right.
Finally, the last possibility of sale is when the company goes public through an ' Initial Public Offering (or IPO in English). At that point, the investor's holdings, in the form of dematerialized shares deposited with his or her bank, will be freely exchangeable on the relevant stock exchange. So, the transfer will involve only the minimal costs that the bank or broker may charge for buying and selling securities, without the need for notary intervention, without having to personally find a buyer, and the selling price will be dictated by the market.
Or discover all the lessons from the "Ultimate Guide to Investing in Equity Crowdfunding".
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