Investing 101: Understanding the deal type

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Investing 101: Understanding the deal type

Investing in companies doesn’t just come in the form of stocks and shares. There are many different types of ‘deal’, and the financial jargon surrounding them can be confusing. In the final installment of our Investing 101 series, we’re going to break down what each one means in plain English.  

When we speak about a ‘deal’, we’re essentially talking about an agreement entered into by two or more parties for their mutual benefit.

One of the most common types of deal is an equity stake. That is stocks and shares, and it essentially translates to the percentage of a business owned by the holder. All opportunities on STAX are equity deals, but there are also other widely used deal types such as convertible notes, funds, and bonds that you'll come across in the wider market.

Convertible notes

When you invest in a startup via a convertible note, you’re essentially lending the company money. In the event that the startup becomes a success, a convertible note can be converted into cash or shares.

Convertible notes typically feature when a startup is in its early stages. Usually, the convertible note becomes equity during a later funding round when a new valuation of the company is set.

Funds

A fund is a pool of money set aside for a specific purpose. A group of investors will pay into this pool, and funds will be spread across a selection of companies. This selection is managed by a fund manager, who may also advise and mentor the selected startups. A benefit of funds is that your investment eggs are diversified across several company baskets.  

A fund manager might be an angel investor, a venture capitalist, or a supercomputer like Aladdin (who has around $6.3 trillion assets under “his” management).

Bonds

Bonds are essentially an IOU deal between a lender and borrower. A bond is a promise made by the borrower (usually governments and corporate entities) to repay the amount borrowed (principal), plus a fixed interest rate (coupon) within a certain time frame.

Equity

Equity deals can come in the form of equity crowdfunding, Initial Public Offering (IPO), or Private Placement.

Equity deals see investors becoming shareholders. Holding shares in a company means owning a part of that company’s equity. The bigger the investment, the bigger the share. The two different types of shares are referred to as common shares and preferred shares.

With an equity deal, you’ll profit when the share value rises, and if/when you’re paid dividends.

The main risk of equity investing is that shares can be diluted if the company seeks new rounds of funding. Selling shares before a new funding round or holding shares long term are two approaches for mitigating loss of value caused by dilution.  

If you’re ready to take the plunge, you can view our live campaigns here or join us here to stay updated.

James Brannan

Director of Operations at STAX

Sam Henderson

Director of Marketing at STAX

Natalia Forato

Social Media Manager at STAX

All views, investment or financial opinions expressed are those of the author and do not necessarily reflect the official policy or position of STAX. The information contained in this post is not investment advice or a recommendation to buy or sell any specific security.
Understand the Risks

Under crowdfunding legislation in Australia, STAX is what’s known as a ‘gate keeper’. That means we’re obliged to check certain company details on your behalf. Read more about how we select companies here.

Like anything in life though, investing on STAX comes with risks. While we carefully screen every company, we can’t actually guarantee their success. Nor do we give any investment advice or take responsibility for losses. We’ve covered the general risks here.

Information is currency.
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