One of the coolest parts of running this blog is how it pushes me to be constantly exploring new financial topics and as I’ve grown, I’ve had more and more financial experiences come my way or come my readers ways and I get the change to discuss them on my blog. For example while running this blog I’ve been able to cover topics like becoming a landlord, saving for kids college funds, saving above and beyond for retirement, dabbling in crypto, and attempting to get a CPA to help with taxes. 

Recently Mrs. Money and I had the chance to jump into a new type of an investment; a startup type equity investment. You’ve likely seen the show Shark Tank in which investors hear pitches and decide whether or not to fund the company using their own money, in return for a percentage of the company. There’s something cool about being an investor like that (or at least to me there is!). 

I’m a big believer of using this blog to share experiences and stories; I figure their more we can all share the more knowledgeable we’ll become. So, I’d love to share a little on the details for how it all went down! 

A quick primer on investing 

There are all sorts of businesses and stages of a business you can invest in. Even the stock market is a form of shark tank style investing; just that the companies are often quite established and in many cases large. You see the going price (the share price) and you decide if that’s a worthwhile price to pay. If you decide to buy, you then become a micro-owner in the company and are entitled to a portion of their income via dividends and/or an increase in the share price. A startup is very similar except that you can’t as easily pull your money out as the company isn’t publicly traded, it’s private. 

Depending on the stage of the business, it could be very early stage, I.e. just an idea. Investment at this stage are often referred to as FFF – family, friends and fools, as they are the only folks likely to give you money for just an idea. Then as the business grows and hopefully starts making real money, you might need to continue to take on investors; to grow the business, to market more, to buy new machinery all in an attempt to sell more widget. In return for your investment, you’ll be granted equity or ownership of the business. The goal is for the value of the business to grow so that one day your x% ownership is worth a whole lot more. 

Startup investing is very risky. Mrs, Money and I waited years before we felt financially ready to make a riskier investment like this. Even once we felt ready we didn’t throw it at the first company that came along offering equity for cash – we were picky!

The business itself

Typically the earlier stage company you are investing in, the better equity package you should be offered. As the old adage goes – more risk, more reward. We picked a business that was a little further along. The business is a food and beverage establishment that started with 1 location and has now grown into several locations in several states. Of course before we were investors we didn’t know for sure but we had a good feeling they were actually making money and we felt good about their continued growth. They have a great market presence and their new locations all seem to be doing well. 

The offer

We have friends in our community that have become investors a few years ago, so we were aware in ballpark numbers what things looked like. Then this year as I frequented the establishment one time I overheard a conversation of a friend chatting with one of the main people and they were chatting about my buddy investing. My ears perked up and I chatted afterwards with my buddy who told me he did plan to buy in but that he needed another person or two. How it worked out for us was that the company wasn’t issuing new shares, it was an earlier investor was looking to sell their shares. This investor was looking to sell shares worth more than my buddy could alone purchase, so he looped me in and we found a 3rd to buy this early investor out.

We ended up haggling a bit on price (everything is negotiable!) and went back and forth for a week or so. Actually credit to Mrs Money for her negotiating skills here as she was the main negotiator for us. We then had to get the blessing of the CEO and a quick docusign along with wiring the money and we made it happen!

Since this is a private company, and it is technically an LLC, we purchased membership units in the company. For a frame of reference, we own less than 1%. 

What surprised me

What was interesting was how little insider information we got before (and after) purchasing. I had kind of expected to see some financial documents or an investor presentation, but didn’t get the chance to. I think that this is the exception to the norm, as other times, I’ve seen those types of documents when looking at investment opportunities. I think that because we did a person to person sale that we didn’t get the chance to dig into the documents. We did shortly after purchasing get to attend the annual investor meeting and that provided us with a whole lot of information. Also this will result in a fun new tax document – a K2 form that gets issued. Apparently sometimes startups sometimes are often delayed in getting these forms to investors! This business is reinvesting basically all of their proceeds so I don’t expect much ‘income’ payable by us right now. Further reason I’m thankful to have a CPA this year!

I did also appreciate the candidness from the CEO when he was like ‘hey look this is still very much a startup, there are lots of risks, we don’t know the future, we might make it big or we might not make it at all!’ 

Overall thoughts

Mrs. Money and I have talked about how we wanted to be in a financial situation where we could have money to be used not only for emergencies but also for opportunities. This investment felt like an incredible opportunity and I’m thankful that we had the chance to make it happen. I do think that start up investing is risky and of course, with any risk you take steps to mitigate those risks. I’ve been thinking a lot about diversification with our finances and an investment like this helps us diversify a little bit more. I don’t think will lose all our money but I also don’t think we’ll become super rich from this investment either. Somewhere in the middle!