The Risks to Consider
Loxley showcases private companies of varying degrees of risk; however, the main risks involved across these types of companies are the risk of loss, liquidity and dilution.
The risk of loss is when a company fails, and you lose your entire investment. This is a possibility with any investment and is more relevant when investing in early-stage companies. Therefore, it is important not to invest any money that you cannot afford to lose. Depending upon your suitability, a general rule of thumb is to invest no more than 10-25% of your financial assets (cash and investments) in high risk investments.
Liquidity is determined by the ability for an investor to sell their investment. With private companies, there is currently no active marketplace to sell shares of private companies and there are certain securities laws on whom you can sell and transfer the shares to. Thus, there is the risk that you may never be able to sell your shares until there is a company wide exit. To sell private company shares you may need to wait until the company is either acquired by another company or goes public and lists its shares on an open stock exchange.
Dilution risk is a reduction in your ownership percentage as the company raises more money by selling new shares to investors in the future. Companies will typically sell new shares to grow their business and cover the increased costs of expansion and growth. Dilution is very common in an early stage company and is often required for the companies to grow and scale faster. As the company accelerates growth by selling more shares, the hope is for a higher valuation of the company – which ultimately means you own a smaller piece of a more valuable company.