Before knowing the differences between investments, you need to know is the private equity or risk capital. Private equity, It is nothing more than the investment fund made up of private companies, which will be used to invest in other companies that have a high growth potential, in exchange for controlling a percentage of the company or, failing that, its actions.
Now if, as we know that is the equity, let’s turn to our subject. The Fintech law recognizes three types of Joint Financing Institutions or crowdfunding / crowdinvesting Article 16, sections I to III:
- Collective financing of debt, in order for investors to grant loans, credits, mutual or any other financing that causes a direct or contingent liability to the applicants;
- Collective financing of capital, in order for investors to buy or acquire titles representative of the capital stock of legal entities that act as applicants,
- Joint financing of joint ownership or royalties, so that investors and applicants held including joint ventures or any other type of agreement whereby the investor acquires part or share in a well present or future or income, profits , royalties or losses obtained from performing one or more activities or projects of an applicant.
According to these points, the responsibility that the investor acquires in the first two options is limited, that is, only receives the payment or a division of the payment of the amount after a liquidation, while in the third point, the investor also acquires responsibility the losses acquired by the applicant’s activities or projects.
That’s why we focus on the first two types of financing deuda or capital, also know as equity, which are the most common models among crowdinvesting platforms.
Debt
The investor is limited to an amount which provide the applicant agrees to settle after a period of time. The benefit to the investor is given through interest rates.
That is, after the entrepreneur covers the amount you need, your relationship ends and the investor have no other benefit in the future, because I got no stake in the company.
For example, if you invest USD $ 2K with a 10% interest, whether the company has an output of USD $ 1M or sold for USD $ 3M, your only going to get the original amount you invested plus interest which it generated investment, ie USD $ 200. So the total you will receive is USD $ 2,200.
In your favor, if you invest under this scheme you will have an assured temporality, which means that you will know the exact amount you should receive. This also helps to have a return on your investment in less time and with less risk. The bad part, is that your performance is limited compared to what you could get vs. the performance of someone who acquired a stake in a company.
Although there are different financial transactions through which the entrepreneur can generate direct liabilities, two are the most common:
- Loan: the investor gives the entrepreneur a fixed amount of money at the beginning of the company. The entrepreneur agrees to return the original amount with interest to be agreed at a certain time. Generally, the loan repayment is done through regular installments and interest is calculated on the total borrowed money.
- Credit is an amount of money, with a limit, the investor gives an entrepreneur. The entrepreneur can have the total amount before the limit or access it according to their needs and the investor will deliver in parts, as needed by the entrepreneur. They pay interest only on the amount of money availing. While the entrepreneur cover money availing, you can continue to have more, while not exceeding the limit. Credits also have a term, but they can be renewed or extended, unlike loans, so their interests tend to be higher.
Equity or Capital
The investor acquires a representative capital of the legal entity title that serves as applicant.
In other words, the investor gets shares in the startup. The benefit or benefits the obtained after agreement on the type of actions and conditions of each one if an event settlement, whether an exit event, sale, fusion, or against a closing of the active if they will face a bankruptcy.
With this type of investment, you get a participation within the company, so you could get your initial investment plus the performance of various multiples.
For example, if a company sells for USD $ 1M, and you invested USD $ 10K in exchange for 10% of the startup; at the time of departure, you will have a return on investment of $ 100K USD, equivalent to a 900% yield. Not bad, right?
While it is extremely attractive to invest in equity for the kind of returns it generates, it is very important to consider that this represents a very high risk, particularly by the fact that as the startup can be output is also likely not get absolutely nothing even have losses. In addition, such investments often take a long time to start generating returns, as they are 5 to 7 years or more on average.
Comparison Chart
As you just read, each investment type is unique and its pros and cons. We’re not saying whether one is better than the other, rather, you have to know is what is best pair you? And this you can define based on your monthly income, how much capital you have to invest, if you can take risks or not, your patience level, etc. Although investment in debt can be more traditional and conservative equity investment is currently one of the emerging options to diversify your portfolio.
