Help with private investment opportunity

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robertmcd
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Help with private investment opportunity

Post by robertmcd » Tue Oct 03, 2017 1:55 pm

Okay here is where I am at:

Age 23
60k income (could increase to 100k-120k if I can move jobs, the market was/is tough since I graduated, but I've been interviewing and have come close to landing a better job)
97k in taxable (stock funds)
13k in roth ira (stock funds)
87k in cds (for future downpayment and emergency fund)
My equities are global market weight with small/value tilts

I have the opportunity to invest in a new company as a "founder", the founders will be putting in 60 million, and then family/friends will put in 170 million for a total of 230 million. The 170 million from friends and family will be B shares subject to the waterfall provisions, etc. The potential for the company is vast, with estimates that it could IPO in 2020 for 5 billion. The founders who created this company are veterans in this industry with a track record to match. His last 3 companies sold for 4.5 bn, 2.5 bn, and 275 million. He is putting in 20 million of his own money. Other founder worth about 70 million is putting in 5 million. I am definitely going to be placing some money in this investment, but the question is how much. The opportunity to own the founders shares will be unlike any opportunity I will have for many years until I grow in my career and it seems as though I have the cash and ability to take risk now before I get married, own home, have kids, etc. I am leaning towards investing 50k, although I could possibly go up to 72k. Thoughts?

j0nnyg1984
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Re: Help with private investment opportunity

Post by j0nnyg1984 » Tue Oct 03, 2017 2:21 pm

sounds legit, I would take out as many CC cash advances and personal loans as possible. Use leverage to your advantage and go all-in.

What could go wrong?

j0nnyg1984
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Re: Help with private investment opportunity

Post by j0nnyg1984 » Tue Oct 03, 2017 2:23 pm

and in reality, you have posted absolutely nothing of value for anyone here to give any pertinent information. There isn't one person here who will tell you to invest money in this "opportunity." You need to provide much, much more information about the financials, market, etc. and hope that someone here is nice enough to go through all of the documentation for you.

I'd tell you to stay away, but it seems that you've already made up your mind.

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TomatoTomahto
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Re: Help with private investment opportunity

Post by TomatoTomahto » Tue Oct 03, 2017 2:31 pm

In addition to what j0nnyg1984 said, with all the billions floating around them,why are they willing to accept your $50k?

Years and years ago, I had an opportunity like this, and invested $10k, which quickly went south. That $10k still rankles, even though it’s a tiny fraction of my NW now. Best tuition I ever paid.

Bogle826
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Re: Help with private investment opportunity

Post by Bogle826 » Tue Oct 03, 2017 2:32 pm

robertmcd wrote:
Tue Oct 03, 2017 1:55 pm

I have the opportunity to invest in a new company as a "founder", the founders will be putting in 60 million, and then family/friends will put in 170 million for a total of 230 million. The 170 million from friends and family will be B shares subject to the waterfall provisions, etc. The potential for the company is vast, with estimates that it could IPO in 2020 for 5 billion. The founders who created this company are veterans in this industry with a track record to match. His last 3 companies sold for 4.5 bn, 2.5 bn, and 275 million. He is putting in 20 million of his own money. Other founder worth about 70 million is putting in 5 million. I am definitely going to be placing some money in this investment, but the question is how much. The opportunity to own the founders shares will be unlike any opportunity I will have for many years until I grow in my career and it seems as though I have the cash and ability to take risk now before I get married, own home, have kids, etc. I am leaning towards investing 50k, although I could possibly go up to 72k. Thoughts?
Okay if I read this correctly, total equity is $230mm and three years from now, the initial public offering will be worth $5.0Bn.

What's revenue right now? 0?

robertmcd
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Re: Help with private investment opportunity

Post by robertmcd » Tue Oct 03, 2017 2:34 pm

I was more looking towards advice from bogleheads on times they invested in a private startup or in their own company when they had the ability to take the risk, and what % of their net worth they put into their company. I am a major skeptic when it comes to VC or angel investing, but this company is already preselling millions of dollars of product, has hired some of the best employees, and has the best assets for this business in the US. I am being done a favor by being allowed in on this share class of the company, and whether it be only 5k or 50k, I am looking for some reasonable advice/stories on taking this type of risk.

Good Listener
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Re: Help with private investment opportunity

Post by Good Listener » Tue Oct 03, 2017 2:39 pm

23 year olds with little in assets (although you have done great for your age) should run away when offered "opportunities" to invest most of their savings. Anybody who tells you that a few hundred million today will probably IPO in the billions in 3 years or less is dreaming. But you may need one loss like I had with an opportunity when I was 30 to get it out of your system. Let us know what you decide.

Ron Scott
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Re: Help with private investment opportunity

Post by Ron Scott » Tue Oct 03, 2017 2:43 pm

It is hard for me to imagine how anyone can get truly wealthy in this country without deep exposure in equity, and a start up is the quintessential play.

Investing in a start up can be exciting. But you obviously need to have a solid understanding of the risk you’re taking with this specific opportunity.

Before taking the leap I would recommend speaking to his many people as possible. You can talk to your family, an accountant and a lawyer. But you might also want to share the prospectus with a financial advisor who has significant experience with start ups.

Getting expert advice on a specific prospectus is beyond the scope of this form. But you need to do so.

BTW: Going from scratch to a $5billion IPO sounds in three years like quite a feat. Just curious, are the initial funds being used to purchase one more existing companies?

Buysider
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Re: Help with private investment opportunity

Post by Buysider » Tue Oct 03, 2017 2:45 pm

If it works as planned, you will have invested too little. If it works like typical deals, you will have put too much in.

Take a look at: http://graphics.wsj.com/billion-dollar-club/

On this list there are only a few that have achieved what you think this investment will achieve. May be it will.

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tyrion
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Re: Help with private investment opportunity

Post by tyrion » Tue Oct 03, 2017 3:07 pm

How much can you afford to lose? That is the limit on what you should invest.

Long long ago, back when I had little to my name but also a very low cost of living, I invested in an IPO that I only had access to because of a friend. In hindsight it was a terrible decision. I put in 10k (basically everything I had) and it actually worked! Over the next year it went up 10x in value during the internet boom. I sold a little along the way, then a little more to help with a house downpayment. Then the whole market tanked, particularly this type of stock, and I was left with less than my original 10k (though I sold 40k worth along the way).

Then came the next opportunity - this one backed by Paul Allen and the IPO was by the same people so I had access to this as well. And this time it was some sort of founders shares if you invested early. 25k minimum buy-in. Well, now I had a wife and a house and my cost of living was not so low, so I couldn't scrape up the funds. And that one went..... nowhere. Everyone lost all their money.

After being lucky twice, I decided this kind of thing was not for me. I stuck to 'regular' stocks, and have since gone almost all index funds.

So maybe you'll get lucky. And maybe you won't. So only put in what you can 'afford' to lose. And by afford, I mean emotionally as well as financially.

Good luck.

robertmcd
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Re: Help with private investment opportunity

Post by robertmcd » Tue Oct 03, 2017 3:13 pm

Thank you tyrion. That is the point I am trying to find, and it is the million dollar question when it comes to asset allocation. It is similar to my decision to not drop 200k into stocks right away in order to try and earn a 3% real return. I basically decided that I could lose 50k and not want to jump off a building (i think) when I originally started investing after finding this site.

JBTX
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Re: Help with private investment opportunity

Post by JBTX » Tue Oct 03, 2017 3:17 pm

The last one sold for $275 million. That is quite a drop off. And is just marginally over the $230 million going into this deal.

This deal sounds too good to be true, but given the limited info you posted it is impossible to tell. Good luck with your decision.

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Watty
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Re: Help with private investment opportunity

Post by Watty » Tue Oct 03, 2017 3:23 pm

robertmcd wrote:
Tue Oct 03, 2017 1:55 pm
60k income (could increase to 100k-120k if I can move jobs, the market was/is tough since I graduated, but I've been interviewing and have come close to landing a better job)
Close doesn't count and there will be a new crop of fresh graduates with your degree in December and May that you will be competing with and many positions for December graduates have likely already been filled.

I would be concerned about your job prospects since the clock is ticking until you get pigeon holed in a lower paying career path.

Depending on your field some of your savings might be better spent on getting additional training or education to kick start your career.

I don't know what field you are in but there are some fields like law have a oversupply of new graduates so the outlook can be ugly for people who do not get on a high paying career path right out of college.
robertmcd wrote:
Tue Oct 03, 2017 1:55 pm
I am leaning towards investing 50k, although I could possibly go up to 72k. Thoughts?
For comparison if you invested $50K in traditional investments then in 40 years when you are 63 it could grow and be worth the better part of a million dollars with only mildly optimistic assumptions. I would not suggest not saving more but that $50K should be enough to fund your core retirement expenses if it is left invested for 40+ years.

One thing I would look at is if you invest the money and lose it then how long will it take to save up another $50K, in addition to normal savings, on your current income.

You are looking at putting around a quarter of your net worth and about a years salary into one investment.

For comparison;
robertmcd wrote:
Tue Oct 03, 2017 1:55 pm
Other founder worth about 70 million is putting in 5 million.


That person is putting in about 7% of their net worth.

Even if it is a good "bet" it is still a bet and that is too much of your net worth to bet.

Investing even 10% of your net worth would be real aggressive but that might work better.
robertmcd wrote:
Tue Oct 03, 2017 1:55 pm
I have the opportunity to invest in a new company as a "founder", the founders will be putting in 60 million, and then family/friends will put in 170 million for a total of 230 million.
That is just for the first round of funding. There is a good chance that there will be future rounds of funding too that will dilute any investment you make and the future rounds of investments may have more favorable terms that could be to your disadvantage.

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Sandtrap
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Re: Help with private investment opportunity

Post by Sandtrap » Tue Oct 03, 2017 3:30 pm

Vast returns.
Opportunity to get in early.
Proven track record.
Chance to get in with the big players.
Sounds like easy money.

A lot easier than putting every dime I've ever made to start a business over 40 years ago, and continued to reinvest every dime until it felt like poverty. . . long story. FWIW I have yet to see, in person, a startup with these high levels of promised returns come to fruition. But, I've never been a big player, nor participated when asked due to my risk avoidance nature. :shock:

At age 23 there is a lot of time to recover loss of funds that you might invest.
If it works out, fantastic. If it doesn't work out, 50k is an inexpensive lesson that will last a lifetime to come.
Good luck in your new business venture.
Not a financial expert - just a retired businessman hacking out of a sand trap -- again.

minimalistmarc
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Re: Help with private investment opportunity

Post by minimalistmarc » Tue Oct 03, 2017 3:44 pm

C'mon Robert, you know this is very high risk right?

This is no different to other VC/microcap investments. Most of them go bust. Sure you might make your millions but most don't.

Also keep in mind, that these early stage companies often issue more shares in stages and if you don't want your holding to be diluted you may need to put more money in. Just because the company does well doesn't necessarily mean you will get as much as you are hoping for.

psteinx
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Re: Help with private investment opportunity

Post by psteinx » Tue Oct 03, 2017 4:55 pm

If investment opportunity is so strong, why is it being offered to you?

You didn't say you'll be working for this company.

Your possible investment, relative to the total launch, is tiny.

Why do they want YOUR money, rather than going, say, to some savvy VCs or the like who could write much larger checks? There's a certain headache factor, I presume, for such a startup to deal with a lot of small-fry investors, and if the investment opportunity is so strong, then presumably they'd have little difficulty getting the money they need from a small number (maybe only one) of deep pocketed investors.

robertmcd
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Re: Help with private investment opportunity

Post by robertmcd » Tue Oct 03, 2017 5:00 pm

We are longtime friends with one of the main founders, and he is doing it as a favor.

bigred77
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Re: Help with private investment opportunity

Post by bigred77 » Tue Oct 03, 2017 5:09 pm

I'm really hoping this doesn't come off the wrong way but your post sounds like you "come from money" in that your have a couple of hundred thousand dollars at age 23 and connections with multi-millionaire entrepreneurs with a 60k income. If you do come from money then why not just roll the dice and invest a substantial sum if you want? Your family would probably backstop you financially if the worst happened (your investment went poof and you were unemployed or something) and if it works out you could be a millionaire yourself before 30.

N10sive
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Re: Help with private investment opportunity

Post by N10sive » Tue Oct 03, 2017 5:12 pm

No one can really make this decision for you and the majority will tell you no.

If you are really debating this. It isn't about the person's track record, who they are funded by etc. It is solely based on the technology or idea. What is the market? Do YOU personally believe the technology can be world changing? And I mean world changing because at your 5 Billion estimate that is close to having a world changing company. I say this because the last investor we had, he sold a company for over 1 billion and most of his current companies are failing. Sometimes you get lucky once.

I've been in the startup game, exhausted over 7 years in a company that promised similar things being sold for 1 billion dollars etc. I never took it seriously, I didn't put in any money, but had plenty of stock. I took it as a learning experience with the possibility of a huge payout. I finally left because the company was always reaching and thinking they could get sold for a billion or hundreds of millions of dollars.

I think the average startup gets acquired anywhere from 15 to 100million. The reality of it being 5 billion in two years, youll need tons of revenue or be a big hit like Uber, Snapchat etc.

psteinx
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Re: Help with private investment opportunity

Post by psteinx » Tue Oct 03, 2017 5:16 pm

For all these supposed unicorns floating around out there (private companies, generally tech, with $1B+ valuation), there don't seem to be a lot IPOing (at least, not at $1B+ valuations). IPOing a ~2017 startup in 2020 for $5 billion would be extraordinary...

CnC
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Re: Help with private investment opportunity

Post by CnC » Tue Oct 03, 2017 5:24 pm

I say 10% of your investments is the absolute max.

Dottie57
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Re: Help with private investment opportunity

Post by Dottie57 » Tue Oct 03, 2017 5:40 pm

No. No. No.

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Pajamas
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Re: Help with private investment opportunity

Post by Pajamas » Tue Oct 03, 2017 7:02 pm

A few thoughts:

Don't count your chickens before they hatch. (Which you seem to be doing! You have no idea if or when or for how much the company will IPO. Talk about $5 billion in 2020 is exactly that: talk.)

Don't invest more than you are willing to lose in anything at any time.

That said, you are young and if you invest $100k and never see a penny of it again, you have plenty of time to recover. Most 23 year olds probably have a low or negative net worth simply because of their age but you seem to be doing just fine. I don't know if this is truly a good opportunity or not, but nothing ventured, nothing gained. At worst, you will be out whatever you invest and will have learned a lesson that you will never forget.
Last edited by Pajamas on Tue Oct 03, 2017 7:16 pm, edited 2 times in total.

Nate79
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Re: Help with private investment opportunity

Post by Nate79 » Tue Oct 03, 2017 7:12 pm

Sure why not. I would put opportunities like this similar to investing in cryptocurrencies. You may get rich, or it may go to zero. I would only put in what you are willing to lose. $50k, which is pretty much a full year's salary for you sounds like a lot, especially considering your small asset base.

Are you debt free? If not then I would not do this.

HenrysCreek
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Re: Help with private investment opportunity

Post by HenrysCreek » Tue Oct 03, 2017 7:51 pm

Only 14 companies have ever made it to "Unicorn" status ($1 billion valuation) in less than 3 years. 14. Some of those are now bankrupt. Others had upwards of $700 million invested (probably diluting initial investor shares dramatically).

http://www.businessinsider.com/fastest- ... r-11111114

You've saved/invested well so far. Don't risk it all on a pipe dream for someone else.

psteinx
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Re: Help with private investment opportunity

Post by psteinx » Tue Oct 03, 2017 7:58 pm

robertmcd wrote:
Tue Oct 03, 2017 1:55 pm
I have the opportunity to invest in a new company as a "founder", the founders will be putting in 60 million, and then family/friends will put in 170 million for a total of 230 million. The 170 million from friends and family will be B shares subject to the waterfall provisions, etc. The potential for the company is vast, with estimates that it could IPO in 2020 for 5 billion. The founders who created this company are veterans in this industry with a track record to match. His last 3 companies sold for 4.5 bn, 2.5 bn, and 275 million. He is putting in 20 million of his own money. Other founder worth about 70 million is putting in 5 million.
Some more points:

It's unclear if the previous successes were by founder A, founder B, or both. But assuming they had decent, founder-ish type shares of those successes, with aggregate sales prices of ~7.3 Billion, then they should presumably have gotten close to or perhaps more than a billion themselves, at least pre-tax. The fact that they're putting only $25 million into this soon-to-be $5 billion IPO is odd.

While you don't list, and perhaps don't know, the net worth of founder A, you say that founder B is worth about 70 million and putting in 5 million.

So he's a founder, he's going to presumably devote the next 3-10+ years of his life to this startup, and he's only putting in $5 out of his $70 million? (~7.1%). He could put in $20 million and still have $50 million in reserve.

===

Another point. It's interesting that this thing will apparently have initial funding of $230 million. That sounds like a LOT. Is this a tech industry startup? Why so much capital up front? Why not proof of concept for $10 million (presumably easily funded out of founders' pockets), then ramp up? With $230 million in at startup, even if this thing DID go to $5 billion (which would be a huge huge success by most standards), that's only about a 22x return. 22x is nice, but many startups that become huge start with $1-10m, and add capital (VC or otherwise) as they scale. That increases returns for early investors, if the company is a success.

What if this company, after a few years, is worth "only" $100 million? That's still a big and successful company, by many standards, but a huge disappointment and loss if the company is seeded with $230 million.

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patrick013
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Re: Help with private investment opportunity

Post by patrick013 » Tue Oct 03, 2017 8:00 pm

Would you grace us by at least telling us
what industry you're in ?
age in bonds, buy-and-hold, 10 year business cycle

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grabiner
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Re: Help with private investment opportunity

Post by grabiner » Tue Oct 03, 2017 8:09 pm

robertmcd wrote:
Tue Oct 03, 2017 5:00 pm
We are longtime friends with one of the main founders, and he is doing it as a favor.
This is a good reason not to invest. If the investment fails, you may lose the friend as well as the money. It is also much harder to objectively view the investment.
David Grabiner

eurobogle
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Re: Help with private investment opportunity

Post by eurobogle » Tue Oct 03, 2017 8:54 pm

I started another thread at a tangent to this one: on the general idea of "shooting for the moon" as a young investor with an investment like this as one potentially investment amongst others.

Allixi
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Re: Help with private investment opportunity

Post by Allixi » Tue Oct 03, 2017 9:02 pm

grabiner wrote:
Tue Oct 03, 2017 8:09 pm
robertmcd wrote:
Tue Oct 03, 2017 5:00 pm
We are longtime friends with one of the main founders, and he is doing it as a favor.
This is a good reason not to invest. If the investment fails, you may lose the friend as well as the money. It is also much harder to objectively view the investment.
I think the risk of that is fairly low. OP should be able to decide for himself not to hold it against his founder friends, if this investment doesn't pan out. It'd probably be good to write out a personal statement of sorts.

On the flip side, there's probably little risk of multimillionaires/billionaires holding it against him, since he's putting in so little relative to other funds and seems to have little to do with this company's operations.

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Noobvestor
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Re: Help with private investment opportunity

Post by Noobvestor » Tue Oct 03, 2017 9:04 pm

The earlier your invest wisely the more it compounds. The idea that you're young and can afford to lose money is, in my opinion, entirely backward - you're young and can let compounding earn for you. You don't have to gamble on long shots that almost certainly will fail.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

robertmcd
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Re: Help with private investment opportunity

Post by robertmcd » Tue Oct 03, 2017 9:34 pm

I guess I got the responses that I expected from this thread. All the research that I have done on this site has made me dislike private equity, especially when I read articles by swedroe on how it performs when risk adjusted compared to the s&p 500, let alone small cap value. Granted that is under the 2%/20% assumption of a private equity fund, but it also happens to be much more diversified than this investment. I like the opportunity of investing in this business for multiple reasons, and I am not expecting a 20x return, but a successful business with a large dispersion of positive returns, although it still carries major risk. I have already opened up to the idea of being more conservative with this investment, and I am going to be considering it for a few weeks before I decide. I know that anything over a few thousand is a significant % of my net worth. I'll be mulling this over for a couple of weeks and generally when I do that, I get much more conservative.

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Re: Help with private investment opportunity

Post by KlangFool » Tue Oct 03, 2017 9:39 pm

robertmcd wrote:
Tue Oct 03, 2017 9:34 pm
I guess I got the responses that I expected from this thread. All the research that I have done on this site has made me dislike private equity, especially when I read articles by swedroe on how it performs when risk adjusted compared to the s&p 500, let alone small cap value. Granted that is under the 2%/20% assumption of a private equity fund, but it also happens to be much more diversified than this investment. I like the opportunity of investing in this business for multiple reasons, and I am not expecting a 20x return, but a successful business with a large dispersion of positive returns, although it still carries major risk. I have already opened up to the idea of being more conservative with this investment, and I am going to be considering it for a few weeks before I decide. I know that anything over a few thousand is a significant % of my net worth. I'll be mulling this over for a couple of weeks and generally when I do that, I get much more conservative.
robertmcd,

If you cannot get this level of return, why are you taking the risk? It is not worth the effort.

I gamble a few thousand on some individual stock. It is less than 5% of my net worth. I only gamble on the stock that has the possibility of 20X or more return.

KlangFool

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Re: Help with private investment opportunity

Post by Spirit Rider » Tue Oct 03, 2017 9:53 pm

To give the OP perspective, I have had founder shares in three (3) separate startups over the decades. In all of those cases I did not invest capital, but received key founder single digit% sweat equity. In all that time I have received a grand total of $212.75.

There are no sure things and that was without investing a penny of my own money.

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Re: Help with private investment opportunity

Post by robertmcd » Tue Oct 03, 2017 10:14 pm

I see no problem in investing in something private with less than a 20x return in 3 yrs. I feel as though all of this really comes down to one thing, how risky is this investment as a company, and will it go to zero (lots of scenarios where this could occur but none seem likely), and will it be more profitable than its competitors now and in the future, etc.? Nobody can be sure, but the investors must consider the risk return characteristics of something like this. Something the big investors know much more about than I do. Making an investment as a percent of net worth is a useful way of looking at the impact an investment can have, but I think it also needs to be looked at in absolute terms, as the savings it would set me back and the cost of not investing it in diversified stocks/bonds instead.

samsmith
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Re: Help with private investment opportunity

Post by samsmith » Tue Oct 03, 2017 10:53 pm

You might want to google the term "accredited Investor." It is my understanding that many private placement opportunities are restricted to "accredited Investors." And from what was listed in the original post, I am not sure the OP would qualify as an "accredited Investor." Maybe this deal is so big that it is registered with the SEC, but otherwise (I believe) it should be limited to "accredited Investors

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BolderBoy
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Re: Help with private investment opportunity

Post by BolderBoy » Tue Oct 03, 2017 10:54 pm

robertmcd wrote:
Tue Oct 03, 2017 2:34 pm
...this company is already preselling millions of dollars of product,
What's the product?
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

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Re: Help with private investment opportunity

Post by CurlyDave » Wed Oct 04, 2017 4:12 am

If you were being offered the chance to put your money into a venture capital firm, with some diversification and a track record, because of a contact you had, I might say to take it.

But that isn't the offer here, you are thinking of one project, and the lion's share of your available capital. I expect the other investors have the resources to diversify into many projects like this one.

* * * * * * * * * *
DW and I have done pretty well, not eight figures well, but maybe someday if we live long enough. Sort of the bottom of the top few %. Neither of us started in extreme poverty, but we haven't inherited a dime either. We are clearly better off than our close friends and anyone in either family.

Whenever people ask me how to achieve that, I tell them that there are a lot of get-rich-quick schemes. But it is always easier to get rich slowly.

I invested aggressively in individual stocks, ETFs, and put both money and sweat equity in rental real estate and had some luck. But always, I was in control. I never invested all my assets in a very illiquid project unless I owned it and knew I was the responsible one. I don't have to run the company that I invest in on the stock market--it is liquid and I can get out when I want to. We both developed side jobs.

Get rich slowly--you invest in more conventional ways, your children might have enough to take a flier every once in a while, and your grandchildren might be venture capitalists.

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Re: Help with private investment opportunity

Post by CurlyDave » Wed Oct 04, 2017 4:22 am

samsmith wrote:
Tue Oct 03, 2017 10:53 pm
You might want to google the term "accredited Investor." It is my understanding that many private placement opportunities are restricted to "accredited Investors." And from what was listed in the original post, I am not sure the OP would qualify as an "accredited Investor." Maybe this deal is so big that it is registered with the SEC, but otherwise (I believe) it should be limited to "accredited Investors
Every once in a while someone will cold call on the phone, make a sales pitch for some investment, and then ask if I am accredited, or sometimes ask if I am an accredited investor. I always put on my best Beverly Hillbillies accent and shout: "Ma, fetch down the shootin' iron". No one ever calls back, and I the only thing I have missed out on is being fleeced.

Opportunity may only knock once, but it never makes cold calls...

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djpeteski
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Re: Help with private investment opportunity

Post by djpeteski » Wed Oct 04, 2017 8:39 am

I will assume this is not an attempt to troll for additional investments. Also that the company is about as "sure fire" as you suggest.
I am leaning towards investing 50k, although I could possibly go up to 72k.
With a stated cash position of 197K, putting 50K into one investment sounds awful risky. Warren Buffet would suggest no more than 10-15%, so between 20K and 30K.

I find a few things extra ordinarily amazing:

Your high taxable investment balance. Extra ordinary for a person of your age and income.
Your likely increase in salary, not many people receive 67% pay raises
Your low IRA balances in relation to taxable.

Any comments on how all of this was accomplished?

David Scubadiver
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Re: Help with private investment opportunity

Post by David Scubadiver » Wed Oct 04, 2017 9:00 am

People should not understimate the excitement of investing with friends and family. There is surely value in such camaraderie. I wish I had friends and family that were billionaires so I could ride their coattails to financial independence. Then again, billionaires can take substantially greater risks than I can because, well, it isn't risky for them to lose what find to be too much.

Truly, they should be raising investments from their RICH friends unless they think this is an opportunity that will truly raise you up. I'd say think very carefully about who is giving you this opportunity and what your relationship is to them.

Valuethinker
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Re: Help with private investment opportunity

Post by Valuethinker » Wed Oct 04, 2017 12:03 pm

David Scubadiver wrote:
Wed Oct 04, 2017 9:00 am
People should not understimate the excitement of investing with friends and family. There is surely value in such camaraderie. I wish I had friends and family that were billionaires so I could ride their coattails to financial independence. Then again, billionaires can take substantially greater risks than I can because, well, it isn't risky for them to lose what find to be too much.

Truly, they should be raising investments from their RICH friends unless they think this is an opportunity that will truly raise you up. I'd say think very carefully about who is giving you this opportunity and what your relationship is to them.
Rich people can afford to take a punt. Most of us cannot.

Rich people generally don't have great investment track records. What they have is more money. They are also prey to financial "advisers", divorce lawyers and all sorts of other wealth leeches.

The rich families I know of that I admire tend to be careful stewards of their money-- commercial real estate (quality buildings in good, global cities); maybe some private equity funds (fees are high); investing with long term value managers (like Oldfield Asset Management or RIT-- Rothschild Investment Trust). If they do art it is fine art-- seldom the modern stuff (ie where the artist is still living) unless it is new artists, not yet "discovered"-- there's definitely a bubble in the modern art market. Wine? They buy it to drink it not as an investment.

If they made their money in their own business they are often pretty good at running it-- think Koch brothers, who took maybe $100m from their father and made it many billions. If say, their father or their grandfather made a fortune in Boston or NY Real Estate then they are often not particularly good at it-- they just start with a lot of money.

I would say let them raise money from rich people. From the rest of us, unless we are going to be actively involved in working with that company and ensuring its success, sitting on the Board etc., I think we should steer well clear (having lost a few investments in the "dot com" era).

ImaBeginner
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Re: Help with private investment opportunity

Post by ImaBeginner » Thu Oct 05, 2017 6:08 am

I did this in the past, in your shoes. It worked great.
Investment 1: 10k became 170k
Investment 2: 25k became 100k
Investment 3: 50k became 250k
Investment 4: 250k became 1.25
Investment 5: will see...
I sat out of investment 1.5, which would have basically been stagnant for 5 years, and 2.5 which was a 3x. Also sat out of another 2.5 which was a 15x.
This was with a very well established group with a long track record of successful investments. The group buys underperforming companies in good industries that they have vast experience with, and rehabs them. One can be successful in that business, but it isn't easy.
I tried another group and lost ~50%, but will see if it ever turns around. That one was a bit more of an investment in the startup type.
I consider every dollar I put into these investments as completely worthless until they actually come back as something. I am never betting a home down payment or anything else I can't afford to lose. I won't be happy if I lose the money, but I assume that is the outcome, although obviously am hopeful for more. From a retirement standpoint I leave these numbers out.
IT IS HIGH RISK. Would start with the lowest amount you are allowed for your first one, definitely never stretch to make it bigger.

Despite my high success, I am now reformed and sticking to primarily a 3 fund approach, until the current opportunities I am in sell. I no longer have the need for that type of risk, or the desire.

Grt2bOutdoors
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Re: Help with private investment opportunity

Post by Grt2bOutdoors » Thu Oct 05, 2017 6:18 am

What is the networth of the founder who is putting in $20mm? How is founder funding his investment? - is he borrowing against his vast sized investment portfolio via a small margin loan or collateralized loan elsewhere? Now, lets look at your networth, roughly 100k in non retirement accounts, you are willing to put $72k at risk or 72%. Does that sound rational to you? If you took your 72k and placed it on a roulette wheel - two outcomes only, you hit black and win or hit red and lose - what happens to your networth, how long does it take you to recoup loss? Never mind the opportunity cost of future compounded gains on that money. Now look at founder, lost $20 million, worth 700 million after the loss. Good luck!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Bacchus01
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Re: Help with private investment opportunity

Post by Bacchus01 » Thu Oct 05, 2017 6:51 am

How much leverage are they taking on? What is the leverage ratio?

Maverick3320
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Re: Help with private investment opportunity

Post by Maverick3320 » Thu Oct 05, 2017 7:08 am

robertmcd wrote:
Tue Oct 03, 2017 2:34 pm
I was more looking towards advice from bogleheads on times they invested in a private startup or in their own company when they had the ability to take the risk, and what % of their net worth they put into their company. I am a major skeptic when it comes to VC or angel investing, but this company is already preselling millions of dollars of product, has hired some of the best employees, and has the best assets for this business in the US. I am being done a favor by being allowed in on this share class of the company, and whether it be only 5k or 50k, I am looking for some reasonable advice/stories on taking this type of risk.
If it was such a great investing opportunity, I doubt they would be reaching down to 23 year olds for seed capital. And have you ever noticed that every angel investor is only investing in the best companies with the brightest futures? I've heard similar stories from friends who have done this. They were all "allowed" in as a "favor" as well. It's all they can talk about when they are initially investing. Later on...crickets.

Honestly, though, I say go for it. But please do us all a favor: come back in 1/3/5/10 years and let us all know how it turns out.

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grayfox
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Re: Help with private investment opportunity

Post by grayfox » Thu Oct 05, 2017 7:22 am

robertmcd wrote:
Tue Oct 03, 2017 1:55 pm
Okay here is where I am at:

Age 23
60k income (could increase to 100k-120k if I can move jobs, the market was/is tough since I graduated, but I've been interviewing and have come close to landing a better job)
97k in taxable (stock funds)
13k in roth ira (stock funds)
87k in cds (for future downpayment and emergency fund)
My equities are global market weight with small/value tilts

I have the opportunity to invest in a new company as a "founder", the founders will be putting in 60 million, and then family/friends will put in 170 million for a total of 230 million. The 170 million from friends and family will be B shares subject to the waterfall provisions, etc. The potential for the company is vast, with estimates that it could IPO in 2020 for 5 billion. The founders who created this company are veterans in this industry with a track record to match. His last 3 companies sold for 4.5 bn, 2.5 bn, and 275 million. He is putting in 20 million of his own money. Other founder worth about 70 million is putting in 5 million. I am definitely going to be placing some money in this investment, but the question is how much. The opportunity to own the founders shares will be unlike any opportunity I will have for many years until I grow in my career and it seems as though I have the cash and ability to take risk now before I get married, own home, have kids, etc. I am leaning towards investing 50k, although I could possibly go up to 72k. Thoughts?
The question to ask is: "How much to put into this?"

Apply the Kelley Criterion, which tells you how much of your bankroll to put in, given the odds offered and Probability of Winning. Kelley Criterion Calculator. Example:

Bankroll = 100
Odds Offered = 30 to 1 (Payoff $5B on $170M)
Prob(Winning) = 10%
RESULT: Optimal bet is 0.0700

You have to guesstimate the payoff and probably of winning. Or consider various values. Or make conservative guesses.
Zero result would mean that you don't make the bet. Negative means that you would take the other side of the bet, if possible.

P(W) Kelly for 30 to 1 Odds
1% -0.0230
2% -0.0127
3.23% 0.0000
5% +0.0183
10% +0.0700
20% +0.1733
50% +0.4833
80% +0.7933
90% +0.8967
95% +0.9483
99% +98.97
100% +1.00

So if you think 10% chance this will succeed and payoff 30 to 1, bet 7% of your "bankroll" on this.
(Q: What to use for size of bankroll? Entire investment portfolio? Or have some desired Asset Allocation to Venture Capital/New Startups, e.g. 10% of portfolio, and then bet 7% of that)
Gott mit uns.

soccerdad12
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Re: Help with private investment opportunity

Post by soccerdad12 » Thu Oct 05, 2017 8:23 am

I have been approached many times to invest in small companies, but only did it once in a friends and family round. I knew the founder and understood the product and it's use. It was a true start-up that hadn't sold one thing yet and the product was only in concept phase. I came in under the same paperwork and valuation as a very reputable VC in the space that was doing tons of due diligence. One thing the CEO told me.... don't invest any money that you can't afford to see go to 0. That actually made me feel a little better. That was 2 years ago. Here is what I have learned so far....

1. The company is doing well and has millions in yearly sales now, but aren't profitable yet. With growth they have raised a couple of more rounds of capital and with every round my initial investment is getting diluted. I have chosen not to participate in any of the rounds past my initial investment.
2. Even companies that get off the ground, have a real product or service, makes millions in revenue can go out of business even while sales continue to grow. This company needs bridge financing in order to keep going as it isn't self sustaining.
3. I don't even think about that company or the investment and treat that money as if I flushed it down the toilet.

I wish you the best of luck, but investing that way is a very tricky business. If you can't see yourself doing #3, then I think you shouldn't even think about putting money in the venture.

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