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R. Klein, EA
R. Klein, EA, Accountant
Category: Finance
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Experience:  Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
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I am planning to invest in a Fund that will pool Subscribers

Resolved Question:

I am planning to invest in a Fund that will pool Subscribers' capital to purchase securities issued by a startup company. Subscribers will own Interests in the Fund, not securities of the company.

I am angel investing only $1000 in the $200,000 fund. The Fund is passive, only intended for the first round. When future rounds are announced the Fund will not be participating.

I need advice if this is considered a good idea. And I would like to know what to expect if a liquidity event happened.
Submitted: 1 year ago.
Category: Finance
Expert:  R. Klein, EA replied 1 year ago.

R. Klein, EA :

Good morning and thank you for your finance question.

R. Klein, EA :

There are MANY issues with investing in a fund like this, some of which we can call the "Facebook" issues---that of having multiple investors as a single investor.

R. Klein, EA :

However, if you are talking about investing in startups, you either MUST be an Accredited Investor or you must invest through a fnd like which you describe.

R. Klein, EA :

The problem with investing in a fund is that your potential gain is tempered by the interest of the fund managers. In order for the fund managers to have any interest, they are literally taking their profits from yours.

R. Klein, EA :

So, in the long run, your upside potential is lowered than a direct investment, but your risk is also more spread out among several investments rather than one.

R. Klein, EA :

On the downside, a questionable fund manager can cause your investment to disappear into nothingness a whole lot faster since you have no control over the individual investments.

R. Klein, EA :

So your tradeoff is POSSIBLY less risk in exchange for guaranteed lower return than direct investments.

R. Klein, EA :

I hope this helps you understand a little better.

Customer: Thank you. Can you give me give me hypothetical examples of multiple scenarios on what to expect in numbers from my $1k if a liquidity event happened?
Customer: Let's say on these terms:
R. Klein, EA :

I will return in about 30 minutes to answer. I appreciate your patience. Thanks

Customer: My Reservation Amount: $1,000.00Raising: $2,500,000Round Type: EquityPre-Money Valuation: $5,000,000
R. Klein, EA :

Thanks for waiting.

R. Klein, EA :

Potential scenarios are 1) You lose all your investment 2) you have a "liquidity event" where one of your investments goes IPO 3) the fund is disbanded

R. Klein, EA :

It's pretty easy to figure out 1 & 3, but for 2, ANYTHING could happen depending on the even or fund managers' discretion. You would need to read the fund prospectus (you DID read the prospectus, didn't you?) to determine what happens if an investment goes IPO.

R. Klein, EA :

Most likely, (since I have not read your prospectus), I would imagine that any cash out of an individual stock position would cause the funds to GO BACK INTO YOUR FUND account and increase your investment in the fund, rather than you automatically getting cash.

R. Klein, EA :

Let's say that the fund invests in ten $20K investments and one of those 10 goes public at a return of 5 -to-1. Your share of this one investment is (1000/20) or $50.

R. Klein, EA :

Your payout on that one investment is 250. Instead of getting cash, your account MIGHT get credited with $250, BUT since the fund managers have a stake, they might get 20% of that amount. So you would get $200 net from the liquidity event.

R. Klein, EA :

In any case, no matter what the actual return, you will only get a percentage of that since the fund managers will take some.

Customer: Perfect. Thank you.
R. Klein, EA, Accountant
Category: Finance
Satisfied Customers: 2927
Experience: Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
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