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What is equity crowdfunding?

Equity crowdfunding is the process whereby people (i.e. the crowd) invest in an early-stage unlisted company (a
company that is not listed on a stock market) in exchange for shares in that company. A shareholder has partial
ownership of a company and stands to profit should the company do well. The opposite is also true, so if the
company fails investors can lose some, or all, of their investment.

SyndicateRoom offers a unique form of equity crowdfunding: members invest alongside experienced business
angels (the professionals when it comes to equity investments) who negotiate the economic terms for the funding
round and invest a significant amount of their own capital but more on that later.

Risk Warning: Investing in early-stage businesses involves risks, including illiquidity, lack of dividends, loss of
investment and dilution, and it should be done only as part of a diversified portfolio. SyndicateRoom is targeted
exclusively at sophisticated investors who understand these risks and make their own investment decisions.
Please click here to read the full risk warning.

Common questions about equity crowdfunding

Who makes up the crowd?

It used to be that only individuals called venture capitalists, or wealthy business angels (think the dragons on
BBCs Dragons Den), would buy shares in early-stage ventures.

Equity crowdfunding has helped democratise investment into early-stage companies by opening the door to a larger
pool of potential investors, more specifically to individuals the Financial Conduct Authority (FCA) terms
sophisticated investors and/or high-net-worth individuals.

In the UK a sophisticated investor must be at least one of the following:

A member of a network or syndicate of business angels and must have been one for at least six months
Someone who has made more than one investment in an unlisted company in the past two years
Someone who is working, or has worked, in the past two years in a professional capacity in the private equity
sector, or in the provision of finance for small and medium enterprises
Someone who has been in the last two years, or is currently, a director of a company with an annual turnover
of at least 1m

In the UK a high-net-worth individual must have at least one of the following:

An annual income to the value of 100,000 or more

Net assets to the value of 250,000 or more

How can an individual make a return on their investment?

Before going into how investors can make money through equity crowd funding it is important to note that most start-
up companies fail, and when this happens a company is unlikely to be able to pay back its investors (wholly or
partially), let alone offer them any kind of profit on their investment. One should never invest more than they are
prepared to lose.

A report by NESTA showed that business angels who invested in businesses in industries they knew something
about, and who created a portfolio of investments (not putting all their eggs in one basket, so to speak), were more
likely to see a return from their investments.

It generally takes between three and seven years for a company to find out whether a company will sink or swim,
although failures usually happen earlier than successes. There are three main ways that an investor can see a
return on their investment:

1. Dividends: the company sometimes pays a percentage of their yearly profits to shareholders
2. Trade sale: the company is sold to another company for a lump sum, which is divided proportionally between
3. Public offering: the company is so successful that it is listed on a stock exchange and shareholders can sell
their shares at a price determined by public demand

Who holds the shares?

Some equity platforms, like SyndicateRoom, will arrange for your shares to be held under a nominee structure.
Other platforms operate a direct shareholding model.

Be sure you read the fine print for any investment as some platforms offer investors different classes of share
depending on how much they invest. Different share classes can often have different voting rights, as well as
different payouts should the company succeed or fail.

At SyndicateRoom, all of our investors get the same class of shares as the lead investor on the deal.

Are tax reliefs available through equity crowdfunding?

Many investment opportunities that are offered through platforms in the UK offer tax reliefs through either the
Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).

The government has received a number of plaudits for these schemes, which provide tax relief covering from 30%
to over 75% of an investment into an eligible company. Regarding eligibility, investors should check that a company
has received an advanced assurance from HMRC to offer SEIS or EIS relief, as this indicates that the company
meets HMRC's criteria to do so.

Why would you want to invest alongside business angels?

Research by the organisation NESTA indicates that business angels receive a higher than average rate of return on
their investments. Unlike VCs and other funds, business angels put their own money into businesses they choose to
invest in, and as such they are very careful about their investments. There are a number of reasons why this can
benefit the crowd.

Detailed due diligence

Business angels are generally wealthy individuals, able to invest considerable amounts into early stage companies
because they have been successful businessmen and women themselves. As such, they have the experience
necessary to research a company in depth, and may take months doing so.

The crowd tend to be mindful of the type of product or service they invest in, and the size of its potential market, but
are less likely to look into the strength of the team behind the business, to know how to scrutinise a companys
records or to be able to analyse broader considerations, such as the companys competition.

Post-investment guidance

Having a successful business angel as an investor is good for the company because the angel can offer
constructive comments to the company's directors based on their experience, and will generally also have a network
of useful contacts at their disposal - all very helpful in aiding the company to grow.

Negotiating the valuation

Who wouldnt want to price their own company highly? Entrepreneurs are more likely to over-price than under-price
their offering.

Crowd investors have little to no chance of negotiating the pre-money valuation they invest at through equity crowd
funding platforms. However, business angels always negotiate a decent valuation before investing their own

Investing at the right value is crucial to making a good return. Read more about why you should invest at the right
valuation here.

To begin receiving full details of each of our investment opportunities and to enjoy all the other benefits of
SyndicateRoom membership, join for free today.


More information on equity crowdfunding