Why should I invest in private stock with no dividends?
With Title III of the Jobs act, we are seeing companies raising capital from crowdfunding. In many of these cases, they are selling private stock, and will not be paying dividends.
What is my incentive for investing in such a company? Is the idea that at some time in the future, I will be able to find another private investor who will be willing to buy the shares from me at a higher price than I paid for them? How does this stock become monetized?
In my opinion, this is a very risky endevour without a LOT of due diligence on each private company. You need to ask what is their exit strategy for investors and if there are required to take certain actions and/or payments if certain benchmarks are hit. No guarantees, but what if things do work out how would you get paid. In other words, you are spot on and even if they make money, how can you be sure they will pay out anything.
That is the problem with privately held stock where you are a minority shareholder with no control.
Hope this helps and best of luck, Dan Stewart CFA®
When you are buying a private interest in any company you are becoming an equity owner. Usually in early funding rounds like croud funding it is the most risky investment you can make. Generally speaking there is no guarintee that the company you are investing in we be around in the next few years. You are completely dependent on the growth of the business you are investing in and the ability of its management team to navigate their business through some very rough waters before you will have any chance of getting a return on your investment. This is an investment you defanitely are buying low and hopefully selling higher down the road.
There are many way of getting paid and they include the sale of the company to other private investors, selling another company or for the company you invested in going public. It can be a very long road and this is an investment I would make with money you do not mind losing. If you do not have that type of disposable investment assets, I would recommend staying clear of early round croud funding investments.
Your questions are perfect, they identify all of the problems with investing in small crowdfunding opportunities. Unless you personally know the owners of the company offering stock and you trust them and believe in their business model, you should stay away from crowdfunding investments. There is a limited market for their shares and basically the crowdfunding is just replacing the job of a venture capital firm, but spread amoung many people thus not haveing the influence of a singe venture captial fund. Crowdfunding will make you money only if the business grows rapidly and provides sustainable profits. Then when the company goes public or the owners buy you out will you realize a return on your investment.
Very risky endeavor. It is a widely held truth that only 1 out of 3 business startups are still in business 5 years later, so you need to be prepared to lose all the money you invest in any particular venture. Professional private equity investors know this, and their success depends on spreading their investment dollars around amongst many opportunities. Their hope is that the 2 or 3 that strike it rich will offset the many more which flop or struggle to survive. To answer your question though, your investment is very illiquid, and will be difficult to monetize. Your hope would be that if the firm is successful either a) another investor or owner will buy you out or b) the company will go public or get bought by another firm (long shot...) or c) the company will someday distribute profits as dividends (but why should they!!!) I would largely stay away!
You nailed the issue by asking about monetizing the investment. Without dividends, your only hope is that the company sells out at some future date and that all investors are rewarded. That's a big "if." It is probably more likely in some industries than others, but the general likelhood is low. Crowdfunding seems more to me like marketing than investing ... trying to make friends and customers feel part of a new venture. There is nothing wrong with that, but remember that investment prospects are low. Do it for fun, do it for prestige, do it for personal fulfillment. Don't do it for investment purposes.