Early investors in a start-up, growth and scale-up (SG&S) businesses are the heroes of our businesses: they take a chance on the founders and their vision. Crowdfunding allows many people, or entities, to invest in and support SG&S businesses, often with no known exit method. It is widely agreed that a secondary market is the natural and essential evolution of the market. A secondary market is becoming increasingly important for the investor, but what about for the company raising the money? Why should they allow their stock to be transacted on after the initial raise?
Firstly, to address a concern which some firms face; is the public nature of having your firm’s equity tradable. By doing a crowdfund, a business already moves into the public domain. Investors have paid their money across to a business they believe in, and the investors want to realise a return on their investment. As a result, the investors are well within their rights to seek information on the progress of the business and their investment. Being in the public eye is not for all companies, but it is a powerful manner in which to engage customers in the brand and generate required growth capital to help build the business. Below are some of the advantages of listing on CrowdX:
1. Capital and process efficiencies
Over and above the engagement with investors, by having a company’s equity traded in a secondary market, the business should gain some major capital and process efficiencies. The management of corporate action like dividend payments, share splits, buybacks and other events in a growing company’s life are taken care of by the operating marketplace. Processes for awarding and incentivising staff and other key stakeholders becomes possible in a fair, transparent and simple manner.
2. Fair valuation method
By having a method of valuation, driven by supply and demand, a business positions itself well for further investments, either through future crowdfunding raises or through Venture Capital (VC) or Private Equity (PE) partners. CrowdX works with the firms that will be undergoing an additional funding round to ensure there is no price manipulation prior to a new funding round.
3. Larger initial capital raises
Notifying potential investors during the crowdfunding round that they will be able to sell all or portions of their positions should result in larger capital raises. There is value in the ability to take partial or full profits at a convenient time and investors should be pricing this into their investment hypothesis.
4. Future negotiating leverage
VC and PE firms and angel investors have, for many years, been able to operate from a position of strength. They hold the money and have experienced teams that are able to negotiate what they want out of a deal. Having the equity of a firm tradable on a secondary market levels the playing field and positions the business with a valuation which is undisputed and can be used by the firm as leverage in a negotiation at a future point.
5. Staff and shareholder incentivisation
Furthermore, businesses which allow the transacting of their equity on a secondary market create an incentive for their staff and other shareholders by providing a valuation and a means of converting what is often earned as ‘sweat equity’ into real cash. Sweat equity is the non-monetary investment that owners or employees contribute to a business venture. Startups and entrepreneurs often use this form of capital to fund their businesses, by compensating their employees with stock rather than cash.
CrowdX will soon offer initial raises and secondary raises for growth companies. A retail investor can’t trade directly through our platform, but that investor can trade on our platform through their broker. If you wish to list your firm, please contact us.