Investments in Startups or early stage opportunities (“Startups” involve a high degree of risk. Financial and operating risks confronting Startups are significant. While targeted returns should reflect the perceived level of risk in any investment situation, such returns may never be realized and/or may not be adequate to compensate an Investor or a Fund for risks taken. Loss of an Investor’s entire investment is possible and can easily occur. Moreover, the timing of any return on investment is highly uncertain.
The Startup market is highly competitive and the percentage of companies that survive and prosper is small. Startup investments often experience unexpected problems in the areas of product development, manufacturing, marketing, financing, and general management, among others, which frequently cannot be solved. In addition, Startups may require substantial amounts of financing, which may not be available through institutional private placements, the public markets or otherwise.
Investment in Technologies
The value of an Investor’s or a Fund’s interests in Startups may be susceptible to factors affecting the technology industry and/or to greater risk than an investment in a vehicle that invests in a broader range of securities. Some of the many specific risks faced by such Startups include:
Changing Economic Conditions
The success of any investment activity is determined to some degree by general economic conditions. The availability, unavailability, or hindered operation of external credit markets, equity markets and other economic systems which an individual Startup or a Fund may depend upon to achieve its objectives may have a significant negative impact on a Startup’s or a Fund’s operations and profitability. The stability and sustainability of growth in global economies may be impacted by terrorism, acts of war or a variety of other unpredictable events. There can be no assurance that such markets and economic systems will be available or will be available as anticipated or needed for an investment in a Startup to be successful or for a Fund to operate successfully. Changing economic conditions could potentially, and frequently do, adversely impact the valuation of portfolio holdings.
Future and Past Performance
The past performance of a Startup or its management, a Lead Angel, or principals of Advisor, is not predictive of a Startup’s or a Fund’s future results. There can be no assurance that targeted results will be achieved. Loss of principal is possible, and even likely, on any given investment.
Difficulty in Valuing Startup Investments
It is enormously difficult to determine objective values for any Startup. In addition to the difficulty of determining the magnitude of the risks applicable to a given Startup and the likelihood that a given Startup’s business will be a success, there generally will be no readily available market for a Startup’s equity securities, and hence, an Investor’s investments will be difficult to value.
A significant portion of an Investor’s investments (either directly or through Funds) will represent minority stakes in privately held companies. As is the case with minority holdings in general, such minority stakes will have neither the control characteristics of majority stakes nor the valuation premiums accorded majority or controlling stakes. Investors and Funds will be reliant on the existing management and board of directors of such companies, which may include representatives of other financial investors with whom the Investor or Fund is not affiliated and whose interests may conflict with the interests of the Investor or Fund.
Lack of Information for Monitoring and Valuing Startups
The Investor or the Fund may not be able to obtain all information it would want regarding a particular Startup, on a timely basis or at all. It is possible that the Investor or the Fund may not be aware on a timely basis of material adverse changes that have occurred with respect to certain of its investments. As a result of these difficulties, as well as other uncertainties, an Investor may not have accurate information about a Startup’s current value or the value of the securities held by a Fund.
No Assurance of Additional Capital for Startups
After an Investor has invested in a Startup, either directly or through a Fund, continued development and marketing of the Startup’s products or services, or administrative, legal, regulatory or other needs, may require that it obtain additional financing. In particular, technology Startups generally have substantial capital needs that are typically funded over several stages of investment. Such additional financing may not be available on favorable terms, or at all.
Absence of Liquidity and Public Markets
An Investor’s investments will generally be private, illiquid holdings. As such, there will be no public markets for the securities held by the Investor, directly or through a Fund, and no readily available liquidity mechanism at any particular time for any of the investments. In addition, an investment in a Fund will be illiquid, not freely transferrable, and involves a high degree of risk. There is no public market for membership interests in a Fund (an “Interest”), and it is not expected that a public market will develop. Consequently, an Investor will bear the economic risks of its investment for the term of a Fund.
There are many tax risks relating to investments in Startups are difficult to address and complicated. You should consult your tax advisor for information about the tax consequences of purchasing equity securities of a Startup or an Interest in a Fund.
Withholding and Other Taxes
The structure of any investment in a Startup or in or by a Fund may not be tax efficient for any particular Investor, and no Startup or Fund guarantees that any particular tax result will be achieved. In addition, tax reporting requirements may be imposed on Investors under the laws of the jurisdictions in which Investors are liable for taxation or in which a Fund makes investments. Investors should consult their own professional advisors with respect to the tax consequences to them of an investment in a Startup or a Fund under the laws of the jurisdictions in which the Investors and/or the Startup or Fund are liable for taxation.
Limited Operating History of Investments
Each investment is or may be a newly formed entity and has no operating history. Each Fund’s investment program should be evaluated on the basis that the Advisor’s, or where appropriate, a Lead Angel’s assessment of the prospects of investments may not prove accurate and that the Fund will not achieve its investment objective. Past performance of a Lead Angel, the Advisor or its principals, or the management of a Startup is not predictive of future results.
Conflicts of Interest; Investment Opportunities
Instances may arise in which the interest of a Lead Angel (or its members or affiliates) may potentially or actually conflict with the interests of a Fund and/or its Investors. For example, conflicts of interest may arise as a result of a Lead Angel having investments in portfolio companies of the relevant Fund as well as other investments both public and private.
Investors in a Startup may have conflicting investment, tax, and other interests with respect to Startup investments, which may arise from the structuring of a Startup investment or the timing of a sale of a Startup investment or other factors. As a consequence, decisions made by the manager of a Fund on such matters may be more beneficial for some Investors than for others. Investors should be aware that the manager of a Fund intends to consider the investment and tax objective of each Fund and Investors as a whole when making decisions on investment structure or timing of sale, and not the circumstances of any Investor individually.
Lack of Investor Control
Investors in a Startup will not make decisions with respect to the management, disposition or other realization of any investment made by the relevant Fund, or other decisions regarding such Fund’s business and affairs.
Certain information regarding the Startups will be highly confidential. Competitors may benefit from such information if it is ever made public, and that could result in adverse economic consequences to the Investors.