[HN Gopher] Investing in Startups by Passing the Series 65
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Investing in Startups by Passing the Series 65
Author : 18nleung
Score : 89 points
Date : 2021-10-13 17:57 UTC (1 days ago)
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| funshed wrote:
| I loved the get-out clauses. Though being from UK I am a little
| confused, you need authorisation to buy shares in a SME in the
| US?
| jsjsbdkj wrote:
| If you're a college student and you put 1k into your friend's
| startup, is there a risk that's actually a negative signal for
| future investors? Do investors in a real series A want a cap
| table that has a bunch of friends and family chipping in a grand,
| or are they just going to ask to wipe the slate clean?
| rmah wrote:
| Your small investment is not, by itself, a negative signal.
| However, a lot small investors can lead to headaches down the
| road as once you pass the 99 investor threshold more
| regulations apply. Also, dealing with a bunch of investors is a
| PITA.
| [deleted]
| enra wrote:
| It doesn't matter much if the company is generally VC fundable
| or doing well. Ideally you have investors that can help you and
| the company, but if you have few friends there too, no-one
| should care.
|
| We raised some money from friends, family and angels at pre-
| seed, and at seed & series A, the VC didn't have single
| questions the cap table.
|
| But the companies should have legal counsel, and try to use the
| standard YC SAFEs not to give people some weird terms. Also as
| a startup founder, you should make clear to family/friends/non-
| professional investors that investing in the startup is very
| risky, and as a minor investor they don't really have any
| rights as an investor, except hopefully have some returns for
| their investment.
|
| There is some horror stories where someone gets their dentist
| as an investor and they start calling you every week about
| updates or show up at the office to chat about the business
| plan.
| funshed wrote:
| Good Question..
| mhb_eng wrote:
| My experience with this, though this may not be the consensus
| view, was that participation from friends/family was
| generally a good sign, since founders clearly believe in the
| business to the point of pitching their friends to invest
| (and getting deals closed shows some evidence of sales
| ability).
| vmception wrote:
| The other aspect of this is that the door is open for an
| accreditation-specific test to become approved.
| gahays68 wrote:
| Check out Doriot.com / they're the first to submit an
| application to the SEC to become approved and have a product
| already in market
| LurkingPenguin wrote:
| Elizabeth wears turtlenecks daily and her startup has a star-
| studded board of directors with little relevant experience in
| its industry.
|
| You invest as much as you can access through a credit card
| cash advance because:
|
| a) FOMO
|
| b) YOLO
|
| c) TMI
|
| d) TL;DR
|
| e) ABCD
| slowhand09 wrote:
| f:WallStreet Bets
|
| *your post wins the commentary for this entire thread.
| cortesoft wrote:
| Matt Levine has written about the problems with opening up this
| kind of investing to everyone.
|
| One of the major differences between earth stage startup
| investments and normal public companies is that there is not an
| open market. Startups can choose their investors, and don't have
| to give the same price to all investors.
|
| So yes, if you get accreditation, you will be able to find a
| startup to invest in... however, it isn't going to be the best
| startups, and you aren't going to get the same valuation that big
| VCs get.
| dogman144 wrote:
| What's the minimum possible investment you'd need to be taken
| seriously by a startup - 5k, 10k, etc?
|
| What rounds would you look at mostly? Assuming it's gotta be
| seed-ish unless you're very liquid.
| lmeyerov wrote:
| As a founder, you don't want tons of small checks because of
| legal complications (> 99 entities on your cap table) and not a
| good ROI on your time initially + ongoing. A workaround is
| bringing in someone to run a syndicate on AngelList or some
| other bundling, making it their focus vs yours, and condensing
| to one entity.
|
| The result is, as an individual investor, you can focus on
| those syndicates. Two benefits are you can spread risk by doing
| a wide variety of small investments, and while following more
| experienced individuals.
| themanmaran wrote:
| I've seen that changing a bit recently with the AngelList
| Roll-up vehicle[0].
|
| It's almost like crowdfunding for seed rounds, but still with
| $5k - $20k kinda checks. But it helps out a lot with the
| legal side of things, so you don't need an investment
| agreement with a dozen different investors.
|
| [0]-https://www.angellist.com/ruv
| toomuchtodo wrote:
| It really depends on the startup, their traction, and your
| relationship with the founders. I've had folks ask for
| $10k-$20k for a seed round (the line between angel and seed is
| very blurry imho) with zero traction and a rough idea of the
| product market fit with a barely functioning MVP, and another
| team I spoke with wasn't talking to anyone without $100k to
| invest. Once you're past the seed stage, unless you're
| connected or an employee, it's $1MM+.
|
| I focus on seed stage as I'm seeking high risk high return
| exposure for this part of my portfolio (and I'm not liquid
| enough to participate without investing in a fund for Series A
| on, unless I'm leveraging as part of a transaction).
|
| (n=1, YMMV, accredited investor)
| dogman144 wrote:
| thanks!
| toomuchtodo wrote:
| Happy to help.
| jedberg wrote:
| > To be completely honest, in practice, this whole process of
| accreditation -- at least right now, for the purposes of startup
| investing -- was sort of unnecessary. As a relatively cash-poor
| college student, I don't have much investable capital to begin
| with
|
| I mean I guess it was a fun learning experience, but I'm not sure
| why they would go through the trouble.
| atlgator wrote:
| I've considered getting my Series 65 for this same reason, but my
| concern was how it would affect my other investments. e.g. your
| typical low-cost brokerage accounts with TD Ameritrade, Schwab,
| etc are not available for professionals. In fact, it seems like
| everything costs a lot more if you are a licensed professional.
| bertjk wrote:
| Does passing Series 65 automatically make you a professional
| for these intents and purposes?
| slowhand09 wrote:
| This derails any thoughts I had re Series 65...
| jackcosgrove wrote:
| I thought the name of the game in VC was investing in 20+
| companies and seeing what sticks. You would need enough money at
| that point that being an accredited investor would be a foregone
| conclusion according to the net worth standard.
|
| Investing several thousand here or there on one or two companies
| seems incredibly risky, riskier than what the pros are willing to
| tolerate.
| tedmiston wrote:
| Correct. Much better idea statistically to just throw it into a
| good index fund if your goal is returns.
|
| Perhaps it could be useful if the goal is learning oriented.
| dbish wrote:
| Yes, I'm seeing a lot of younger people trying to play the
| angel investor game without the capital and without realizing
| many angels don't make reasonable returns but it doesn't matter
| to them because it's play money and more a chance to support
| new ideas and learn about things. Personally, I put aside an
| amount I want to angel invest every year and assume it's burned
| but I really couldn't afford to do that in a responsible way
| until I was well beyond the accredited investor minimum point
| (in yearly income).
| browningstreet wrote:
| In regional hubs, a lot of the angel networks are retired
| people. Most of them, in my experience, are playing at being
| technologists or investors. They usually made some money in
| more traditional business endeavors. Usually gets a bit of
| traction in the local government / business lunch / community
| innovation scene.
| vc-doggie wrote:
| Absolutely, this.
| cbtacy wrote:
| Yup. It's important to understand how the Power Law Curve
| applies to early stage investing.
| vincentmarle wrote:
| > found, however, that there was an "internet adviser exemption"
| for advisers that give advice entirely through the internet. That
| sounded like an exemption I could qualify for -- I would just
| have to commit to not giving any face-to-face investment advice
|
| One thing I didn't understand from this article is what "giving
| investment advice" has to do with being an accredited investor
| and investing into startups. Can someone clarify that?
| gregshap wrote:
| Investing in startups generally requires being an accredited
| investor. To be an accredited investor they need to pass the
| Series 65 test and get licensed. Licensing can be state or
| federal, but federal is generally more convenient. Federal
| registration usually requires significant assets under
| management which the author certainly doesn't have, but the
| "internet adviser exemption" allows them to register federally
| (SEC) without the $ minimum.
| dragonwriter wrote:
| > One thing I didn't understand from this article is what
| "giving investment advice" has to do with being an accredited
| investor and investing into startups. Can someone clarify that?
|
| The article addresses this: the SEC accredited investor
| classification has several ways to qualify, the older ones are
| variants of "rich enough to presumably know what they are
| doing" and the newer ones added are "has one of a specified
| list of professional licenses/certifications that directly
| relate to knowing what they are doing with investments", and
| the particular one that the author chose to pursue for that
| purpose was related to giving investment advice.
| Projectiboga wrote:
| There is still a catch, any firm using a Regulation D exception
| has to go public if their shareholder total goes over 500. The
| loophole is that they could require a minimum amount and for the
| smaller amounts to join together into their own fund.
| iammisc wrote:
| Great writeup. Been thinking of doing the same thing.
|
| > the unspoken secret is that accreditation -- at least when
| investing in individual startups, and especially if the founder
| is a good friend of yours -- is just a box you can check that
| nobody verifies
|
| I've heard this as well, and it's a very sad thing, because it is
| one of those 'secrets' that if you knew, it'd open up a lot more
| opportunities for you. There are few 'secrets' separating the
| rich and poor, but this is unfortunately one of them.
| vmception wrote:
| The legal consequence isnt on you, its on the company selling
| shares. So just like the Texas law, it deputizes everyone else
| to shut out poor people instead of being a prohibition from the
| state directly on the poor person. In practice that means just
| never talking to poorer people about opportunities, and letting
| them figure out that they cant even raise capital because none
| of their friends are accredited. Just American things.
|
| Its Super effective!
| czbond wrote:
| You act like startups are some "keep poor people down
| scheme". It is because startups are incredibly high risk, and
| they will most likely lose their money. "Poorer" people can't
| stand to lose 8/10 bets they place in most cases. Only in the
| past 10 years with bubble money, and bubble VC exits are
| Silicon Valley startups seems as 2/10 gold mines. Before
| that, they were few/far between with a lot of failures.
| Startups are a failure game.... because their default mode is
| "fail".
|
| Also note, outside of SV - the rate is nowhere near 2/10
| billion valuations.
|
| Making sure an investor has financial acumen helps founders
| focus because it is hard enough raising money from
| angels/VC's in $10k+ amounts - imagine if you only raised
| $100-$1k per person. Egad! Crowdfunding might be an exception
| to this - but it is fairly new.
| vmception wrote:
| I don't think anyone specific is responsible for this
| exclusionary-by-class system, I do think there are some
| opportunists that perpetuate it, and for that just look at
| the discussions and comments over the accredited investor
| regulations hosted on the SEC servers.
|
| People shouldn't need to ask for permission to fail.
|
| In case it isn't clear, I am not saying startup investing
| is a golden ticket, and my comment wasn't about startups at
| all, it was about all private equity and I'm not saying
| thats a golden ticket either.
|
| Whether inadvertent or deliberate, an unnecessary class
| system exists which should not.
| mikkel wrote:
| Raising $100-$1k per person is technically easy enough
| nowadays with crypto. The hard part is keeping it legal.
| vmception wrote:
| > Making sure an investor has financial acumen helps
| founders focus because it is hard enough raising money from
| angels/VC's in $10k+ amounts - imagine if you only raised
| $100-$1k per person. Egad! Crowdfunding might be an
| exception to this - but it is fairly new.
|
| That has zero to do with the existence of accredited
| investor rules.
|
| In the current reality, many issuers have their own minimum
| investments such as $25k, $500k, $1mm. This successfully
| keeps out people that either don't have those sums of money
| or are encumbered by life expenses, far more than the
| accredited investor rules do.
|
| An alternate reality without those rules also retains the
| ability for issuers to deny capital from whoever they want,
| and by soft-denying capital by setting minimum amounts.
| czbond wrote:
| I don't see this as some equity issue people are framing
| it as.
|
| Issuers have the rules of $25k, $500k, etc bc they really
| don't want to deal with inexperienced investors (doctors,
| dentists, etc, etc).... who get fearful when they write a
| check, are inexperienced and so try to micromanage, and
| worry incessantly about exits and can be short sighted.
| Angels are great at hiding all of this, until after the
| deal closes.
|
| It makes sense to heavily filter people like that out -
| it would be damn terrible as a founder to have to deal
| with 300 people who all invested "their life savings of
| $10k". If you haven't been involved in many private
| deals, you might not believe that. But most deals are
| small, rosey-eyed-until-a-loss-might-occur "angels".
| vmception wrote:
| I don't care about what the issuers do and I am
| completely fine with high buyins to filter people out. I
| want the government out of it completely, but a special
| purpose accreditation test is fine as I only have issue
| with the wealth tests and the tests that require a
| sponsor. (even the series 65 test requires "good
| standing" as the article mentioned, which is more than
| just passing the test recently).
|
| People don't need permission to fail financially, they
| can walk over to any casino and do that. It is merely
| happenstance that its two different governments
| regulating casinos (state) versus these particular
| capital formation rules (federal). But the user
| experience for the individual doesn't factor that in, and
| there shouldn't be a discrepancy at all. The argument in
| favor of "protecting people that actually need their
| money by deputizing everyone else" is so thin and weak.
| As we know, these kinds of "deputize everyone else"
| regulations only exist because a direct prohibition from
| the state to the individual would undermine at least one
| of the individual's constitutional rights.
| gahays68 wrote:
| It doesn't require financial acumen to follow a lead that
| has qualified a deal. It is technically possible to form
| syndicates that corral millions of small checks
| (Blockchain) to follow leads. And while startups are risky,
| the investing discipline is simple: spread your bets among
| several "qualified deals", like poker. Anyone skeptical of
| this should download Fantasy Startup at Doriot.com which is
| working to qualify non-millionaires as SEC
| Accredited....you'll quickly discover that everyone can
| (and should) be investing in startups. All that needs to
| happen is, first, education, and second, scaled access.
| Scaled access will follow once there is a large and growing
| educated population of Mainstreet investors. The average
| age of the Accredited investor is close to 60 years
| old....while 98% of GenZ's and Millennials don't qualify.
| Does it really make sense to cockblock the generations that
| should be investing (given they have time and ability to
| take on risk) and they have to live with the investing
| decisions of today?
| czbond wrote:
| Awesome - no reason to keep anyone from investing in
| them. Anyone loses their money, their fault no matter
| position in life.
|
| Doriot slots into my "crowdfunding" comment above. Agree
| icedchai wrote:
| I've invested in several startups, as an employee
| exercising options, and also as an investor. Unless you
| have a _lot_ of money to spread around, you 're better
| off investing in the stock market.
| vmception wrote:
| I've invested in several private equity funds, and many
| times those funds negotiate things that are far more
| lucrative than equity, such as temporary or permanent
| revenue splits, convertible notes which may be partially
| paid off before converting into extremely large positions
| in the companies, you name it. In this structure, I
| realize from experience, that it is not possible to
| compare the fund's performance to the stock market, as
| every limited partner has their own unique exposure to
| investments that all perform differently.
|
| I've seen the headlines that match what you said, the S&P
| returns more than picking various startups to invest in
| most of the time, and that many funds also mirror that,
| in reality I think all discussion about this is
| inaccurate, because there are additional variables to
| account for. Maybe actual equity will underperform just
| picking S&P equity. But so much more is actually
| happening which will never show up on a cap table or
| comparison of valuation growth or any mandated
| disclosure.
| [deleted]
| ghaff wrote:
| Someone I know retired from an executive role at a tech
| company and, in retirement, he got into doing a lot of
| angel investing. He mostly got out of it except for a few
| companies he especially believed in. He told me he would
| have done far better investing the money in a handful of
| large tech companies.
|
| People think there are these high-return (after adjusting
| for risk) investment opportunities out there off limits to
| the plebes. And it's mostly not true. Sure you can get
| lucky. But over the past decade you could have made a lot
| of money on boring big company investments.
| slowhand09 wrote:
| I've been looking at Kinesis Money as a potential investment
| and hedge. They have a KVT - Kinesis Velocity Token, which
| cannot be sold to investors in the US, unless they are
| accredited investors. There are other avenues to obtain one,
| but apparently they require verification if getting it directly
| from Kinesis.
| ttul wrote:
| Well, maybe. But if your net worth is < $2M and you want to
| build a portfolio of 20 or so startups and then let that play
| out for a decade until one or two have popped and the rest
| failed or languished, you are going to need steel balls.
| [deleted]
| vmception wrote:
| But you can also invest in a fund that gets better deal flow,
| and your exposure can be more easily spread around.
| cortesoft wrote:
| You don't need to be an accredited investor to invest in a
| fund that invests in startups.
| sanderjd wrote:
| Is this true? Wouldn't it have to be publicly traded?
| What publicly traded seed / venture funds are there?
| iammisc wrote:
| The commenter you replied to above is half true.
| Accredited just means you can invest in securities not
| registered with the SEC, like your friend's bakery. Some
| funds are registered with the SEC, some are not. Some
| funds only accept accredited investors, some do not.
|
| Anyone can sell stock to non-accredited investors... it's
| just that it costs much more to do so, so most don't.
| Instead, they go to the already rich upper-class and make
| them richer when the investments pan out.
|
| One aspect that goes completely unmentioned in all this
| is the racial aspect. Many people want equality today,
| but the fact is that for many minorities, they are
| dependent on an upper class that is mostly white to raise
| their money. Instead of being able to issue stock
| directly to members of their own community (and people
| they likely have closer relationships with), they have to
| make a case to people they've never met and are not
| daddy's best friend. If we really want equality, it's
| time to end these restrictions.
| lovecg wrote:
| The SEC actually recognizes the issue and is studying
| possible revisions though no changes have been made yet:
| https://www.sec.gov/files/review-definition-of-
| accredited-in...
|
| There are some reasonable sounding ideas they list:
|
| - Permit individuals with a minimum amount of investments
| to qualify as accredited investors.
|
| - Permit individuals with certain professional
| credentials to qualify as accredited investors.
|
| - Permit individuals with experience investing in exempt
| offerings to qualify as accredited investors.
|
| - Permit knowledgeable employees of private funds to
| qualify as accredited investors for investments in their
| employer's funds.
|
| - Permit individuals who pass an accredited investor
| examination to qualify as accredited investors.
| vmception wrote:
| its good you are aware of their work and on board with
| the research
|
| you should recognize that's 6 years old and everything
| that was going to change has already changed, the article
| of this very thread is about using the new changes
|
| > - Permit individuals who pass an accredited investor
| examination to qualify as accredited investors.
|
| Only a _further expansion_ this last point is what is on
| the table. As taking several FINRA tests do now allow for
| qualification as accredited (as seen in OP 's article),
| and people get to submit new non-FINRA tests, their
| approval has not occurred yet.
| anamax wrote:
| 20 is barely enough. You really want 30-40.
|
| The problem is variance. If 70% fail and only 10% produce
| meaningful returns, you want >>10 so you have a reasonable
| chance of getting average returns.
|
| It's possible to get lucky with 5-10 startup investments but
| the common result is "lost everything" with "broke even" a
| close second.
|
| This applies to working for startups as well....
| 1cvmask wrote:
| There are so many examples of investors passing over friends as
| investments.
|
| In fact from anecdotal observation people do not invest in
| friends in general. It is people one or two removed who take
| the plunge.
| cortesoft wrote:
| This is probably smart. Running a startup is stressful enough
| without worrying that you are risking your friends and
| family's life savings.
| sanderjd wrote:
| On the other hand, this is how Warren Buffett got his
| start, and (from his biography Snowball) it seems to have
| been a strong motivator for him.
| cortesoft wrote:
| Yes, someone wins the lottery. I don't think we should
| use that as evidence that playing the lottery is a smart
| financial decision.
| hbcondo714 wrote:
| For those of you who want more of an introduction to securities,
| checkout FINRA's Securities Industry Essentials (SIE) Exam. It's
| only $60 and open to anyone aged 18 or older, including students:
|
| https://www.finra.org/registration-exams-ce/qualification-ex...
| ramraj07 wrote:
| It's interesting that OP living in a midtown apartment thought a
| 195 dollar Kaplan subscription is too much money and skimped on
| it while spending a lot of their time (wasting) on subpar
| material. Doesn't exactly bode well for good investment acumen
| does it.
| gregshap wrote:
| The author said they were in college. In their defense its not
| uncommon to have loans or parent funding for the expensive
| apartment, but limited discretionary income and limited ability
| get money from the 'college' bucket to the discretionary
| bucket.
| vineyardmike wrote:
| > limited discretionary income and limited ability get money
| from the 'college' bucket to the discretionary bucket
|
| He did say he was funding college from a margin loan on his
| stock portfolio, however.
| gregshap wrote:
| Ha, didn't read that part. I wanted to attest to the
| experience of being a low budget student in a high cost-of-
| living city. The author might not necessarily be that!
| fsckboy wrote:
| > _living in a midtown apartment_
|
| he said he lived in the east village, took the test in midtown
| diab0lic wrote:
| They do admit that mistake and adjusted their viewpoint in the
| article.
| Arcuru wrote:
| Yes, but only after they pirated it, admitted to doing so in
| a front page Hacker News article, and then suggested other
| people do so too.
|
| Do you think tech startups really want an investor who
| advises people to pirate software?
| JamesBarney wrote:
| I imagine that consideration is very far down the totem
| pole of things companies care about their investors.
| fsckboy wrote:
| to be fair, the Kaplan materials were particularly good at
| teaching him about the securities laws and compliance
| section of the exam :)
|
| his stated goal was not to be an investment advisor though,
| it was to be able to invest himself
| gjs278 wrote:
| nobody cares about individuals pirating software or
| subscriptions
| loourr wrote:
| Prime example of why people should be allowed to do this kind of
| investing through a retirement account. Doesn't require you to
| have money, just knowledge.
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