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.
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.
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 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 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.