Who are the investors?

There are three distinct classes of investors in the world of finance:

    • The General Public
    • Angel investors
    • Professional investors (VCs, Funds, Family offices, etc..)

The General Public

Anyone in the United States who is over 18 years old can become an investor. These investors are limited by the SEC in what they purchase and own. They can own shares in a public company as long as they are diversified and the risk of the investment matches their risk tolerance and financial goals. They cannot own shares in private companies unless they are listed on a Funding Portal, such as StartEngine Capital LLC, under the Regulation Crowdfunding rules or on a crowdfunding platform, such as StartEngine Crowdfunding Inc., under the Regulation A+ rules.

The general public investors typically own common shares or bonds in companies. They also sometimes own an IRA or 401K plan to avoid paying taxes on gains until retirement. In the US, consumers own $11 Trillion dollars in investments inside IRA and 401K accounts.

Angel Investors

These investors are called Angel Investors because they are usually the first money inside a new startup outside of friends and family investors. They are accredited investors which means they have at least $250K in annual income in the last two years, or own $1M or more in liquid assets (such as cash, public stocks, public bonds) outside of their primary residence. Only about 5% of the US population qualifies as accredited investors.

They can invest an unlimited amount of money subject to their own discretion in Regulation A+ Online Public Offerings and up to $100K per year in Regulation Crowdfunding Online Public Offerings.

When they invest, they may receive special terms. These terms usually include Preferred Shares, pro-rata investment rights, and anti-dilution. Accredited investors do not typically join the board of directors or exert any kind of management control. They invest in convertibles notes which convert into the same terms dictated by a professional investor, such as a Venture Capital firm.

Professional Investors

These are usually Limited Liability Companies who operate funds composed of limited partners. These investors are considered professional and usually invest with some form of control with typically a seat on the board of directors. They negotiate the investment terms and then if acceptable they will make a large investment in the millions of dollars.

The terms professional investors look for include:

    • Preferred shares that convert into common shares with a liquidity event when the company is sold or goes public. If the sale does not return the full amount of the investment, then the preferred shareholders do not convert and will receive the entire amount of the sale.
    • Anti-dilution provisions. These provisions protect the investor if the company issues shares at a lower price than what the professional investor purchased originally.
    • Seniority. This means the investor's preferred shares are to be redeemed first before any other preferred shares that are junior to their shares.
    • Right of sale. The investor can overrule the decision of the board of directors to sell the company.
    • Right to raise additional capital. The investor can block any sale of capital if it is to be either pari passu (same level) or senior to themselves.
    • Right to raise capital as debt. The investor can block any kind of debt offering.
    • Drag along and tag along. "Drag along" permits the investor to sell a pro-rata portion of their shares in any sale of shares the company, the investors and employees. "Tag along" permits the investor to a pro-rata purchase right if more shares from existing investors or employees are sold.
    • Board of directors seat. The investor has the right to one or more seats on the board of directors. These seats are permanent unless the investor sells a large portion of their shares.
    • Registration Rights. The investor has the right to ask the company to become a public company and list its shares on a national market such as the NASDAQ or the New York Stock Exchange. The company would have to hire a Broker-Dealer to proceed with the Initial Public Offering (IPO). Most private companies aspire to go public but very few end up doing it.

Sometimes Professional investors will purchase a convertible note, which is usually under $1M in total investment, and wait for another investor to come along and trigger the convertible note conversion which will then provide the Professional investor the same right the new investor receives.