How does a potential return of investment work when investing in non-listed companies?
To begin with we'd like to highlight that any type of investment always comes with a risk. You should only invest with money you can afford to lose. You can read more about risks here.
There are a few different scenarios where an investor can receive a return on their investment, here are the most common examples:
Through an IPO (Initial Public Offering)
If the company gets listed. In this scenario the investor's shares are freed and can be sold on an open market.
Through an acquisition and/ or merger
If the company gets sold or merges with another business, the investor can sell their shares to the new company owner.
In both these scenarios above, the return of investment is based on the demand for the shares, just like in any stock market.
Through getting a bigger follow investment
In certain cases, the company might get a substantial investment and the investor could choose to buy back existing shares, giving the investors an option to make a small exit.
When the company earns a profit it can re-invest this in the business and pay a proportion of the profit as a dividend to its shareholders. The distribution to shareholders can be in cash or, if the company has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase.
It is also possible for the investor to sell their shares before an exit, though this is not something we at FundedByMe would recommend if you don't necessarily have to. Equity crowdfunding is about helping a business grow and become successful and this means giving them the chance to deliver as promised.
If you still want to sell your shares it is up to you to find a buyer. The company might also have a Right of First Refusal clause in their terms which means you have to offer to sell your shares back to the company before selling to someone else.
Long term investment
Becoming a shareholder in a start-up or a young company is usually a long term investment, it might take several (usually around 3-7) years before you are able to get a return from it (though there are examples of quick exits as well). With a non-listed company it's not as easy to follow the demand and value of your shares, but if you are an engaged investor you can keep track of how its going for the company. As a shareholder you should be receiving continuous progress reports, and you can always reach out to the entrepreneur to ask for more information.