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> “Rule 9: Don’t ever do anything you don’t understand.” In 2021 I bought $500 of stock in a VR software company who was crowdfunding. Price per share was $4 o

> “Rule 9: Don’t ever do anything you don’t understand.” In 2021 I bought $500 of stock in a VR software company who was crowdfunding. Price per share was $4 on a valuation of $60M. Fast forward two years and they raise again…this time at a valuation of $170M. Naturally, I assumed my $500 was worth close to $1500 on paper. Wrong. By some magic, the common stock share price went from $4 to only $4.75 even as the company tripled in value. Even though I “picked” well, my investment still lagged the general S&P of the same time period. I thought I understood what I was doing, but evidently I was the sucker.

quonn 3y ago
Probably due to „dilution“ where the number of shares is expanded, leading to lower value per share. I was surprised by this, too. It‘s perhaps the most important thing to know when working for startups or investing in them.
- blitzar 3y ago
  Listed companies can and do this as well, typically not on a scale that is so noticeable.
  - chii 3y ago
    > not on a scale that is so noticeable. it's more likely that the equity raised are deployed to produce more value than the "loss" due to dilution. For a startup, this might be harder, since the revenue is less clear, and thus the valuation is very inaccurate. For a mature/listed company, the revenue is much clearer and thus the valuation is more accurate.
TuringNYC 3y ago
Same story for most employees getting tons of equity in startups with a preference overhang https://www.holloway.com/definitions/liquidation-overhang https://www.holloway.com/definitions/liquidation-overhang
ghaff 3y ago
One thing is that with small, especially non-public company investments, even if you have reasonably expert opinion that they're doing something special that isn't really on the radars on the mainstream investment community, market timing can still be off and you probably have no idea what's going on behind the scenes in terms of financing etc.
ajross 3y ago
That kind of scam is exactly why securities trading is regulated. Before the IPO though, all bets are off and unless you're the VC writing the term sheet, you're the sucker.
- matsemann 3y ago
  It doesn't have to be a scam. The pie got bigger, but perhaps because other people added more stuffing (money) to it. So one's original piece remained mostly the same.
  - ajross 3y ago
    The point is that with public securities, the SEC makes sure that it's not a scam. A public company can't just decide one day to issue a ton of stock and hand it over to an arbitrary entity, there's a regulatory process and legislated veto power held by the shareholders/board. When you buy an unregulated security (like shares in a "crowdfunded" startup), that's the protection you're not getting. Most people in this community tend to see the SEC as the enemy, but this is the value it provides.
    - matsemann 3y ago
      Hmm, where I live at least (not US) the company still have to act in a way that's in the interest of its owners. They can't do shady stuff just because they're not publicly traded. Or, they can, but it's not any more legal.
      - robbintt 3y ago
        You can sue in the US but there's really no case for OP. The company is "trying its best to deliver value".
NhanH 3y ago
Practically speaking, when getting stocks/ stock options in startup, you have to trust the integrity of the founders to the point not only for them to do the right things, but to fight for it. Preferred stocks (which VC gets) + dilution means there are a lot of ways to screw over common stocks, and at time when liquidation (that isn’t IPO) happens, a lot of lawyers will have the jobs of minimizing your stake. Which is to say that crowdfunding stock is a baaaaaaaaad idea. You are faceless to the founders, hard to see a scenario when things can go right.
- iambateman 3y ago
  For sure. Meanwhile this latest round raised $12M from 5,600 investors in a couple days. So the management team is getting a massive signal that “this is good.”
oezi 3y ago
Investing in any VC investment as a crowd investor at a valuation of more than 5m-10m is a near certain recipe for disaster.
303uru 3y ago
Preferred stock. IE the rich get to dilute their risk by passing it on to you!
blitzar 3y ago
What was The Founders’s ownership share diluted down to? It wasn’t. What was Peter Thiel’s ownership share diluted down to? It wasn’t. What was your ownership share diluted down to? Point-zero-three percent.
jsmith99 3y ago
Rule #0: before investing in a privately held company make sure you understand the capital structure and obligations and if there are classes of investor with guarantees or seniority.
hn_throwaway_99 3y ago
There are other replies saying you were "scammed", but just examine your own statements to see how something had to give (in this case, the common stock valuation) for anything to make sense. That is, look at your statement (emphasis mine): > Fast forward two years and they raise again…this time at a valuation of $170M. Naturally, I assumed my $500 was worth close to $1500 on paper. If they raised again, it's completely nonsensical to think your stock would have tripled in value. The only way to assume that's even possible is if the company tripled in value without raising more money. After all, "raising" is just another word for selling part of the company to other, new shareholders. When you sell part of something, that means the existing shareholders own less (as a percentage) of it. Yes, there are other bad tricks companies can play with different share classes and obscene preference rights for preferred shareholders (1x is pretty standard and totally fair in my opinion, anything more than that means to me that the company needed to raise under duress or has bad management). In other words, the outcome you described seems perfectly reasonable just by the rules of math. It says to me that many people just don't understand that "raising money" means selling a part of your company.
- iambateman 3y ago
  For sure, I think I was a sucker, not that the company was acting outside of the law. In this case, I’m learning that my perspective on dilution is different from the founding team, who evidently feel fine tripling the share pool - as they should! Their odds of a major exit go up with millions in the bank, and the market is willing to bear that dilution, so of course they dilute. Meanwhile, I end up feeling like I would have been better off buying $450 worth of Dogecoin and a really big pack of oatmeal crème pies.
username135 3y ago
Everyone tries to get cute with financial strategies and investments, chasing those huge returns. You would be hard pressed to consistently beat the returns of a market fund over the life of your portfolio.
jboy55 3y ago
To correct, the Fair Market Value of the common stock went from $4 to $4.75. Saying "Price" indicates you can sell at that value, you most likely can not sell your stock for any price right now. You should value those shares at 0 in your future financial planning. tldr; You bought $500 in lottery tickets with an undetermined draw date in the future with a high chance that it won't happen.
- iambateman 3y ago
  Yea, I understand your point. Price is convenient shorthand for funny money. You’re right that I probably lit my cash on fire.
  - jboy55 3y ago
    Hey, I spent 6 years at a company collecting over 200k options, spending $2k exercising and having new money come in and try a 200:1 reverse split. Now, 15 years later, I'm a proud owner of common stock in a private company that is marginally profitable.

quonn 3y ago

Probably due to „dilution“ where the number of shares is expanded, leading to lower value per share. I was surprised by this, too. It‘s perhaps the most important thing to know when working for startups or investing in them.

blitzar 3y ago
Listed companies can and do this as well, typically not on a scale that is so noticeable.
- chii 3y ago
  > not on a scale that is so noticeable. it's more likely that the equity raised are deployed to produce more value than the "loss" due to dilution. For a startup, this might be harder, since the revenue is less clear, and thus the valuation is very inaccurate. For a mature/listed company, the revenue is much clearer and thus the valuation is more accurate.

TuringNYC 3y ago

Same story for most employees getting tons of equity in startups with a preference overhang https://www.holloway.com/definitions/liquidation-overhang https://www.holloway.com/definitions/liquidation-overhang

ghaff 3y ago

One thing is that with small, especially non-public company investments, even if you have reasonably expert opinion that they're doing something special that isn't really on the radars on the mainstream investment community, market timing can still be off and you probably have no idea what's going on behind the scenes in terms of financing etc.

ajross 3y ago

That kind of scam is exactly why securities trading is regulated. Before the IPO though, all bets are off and unless you're the VC writing the term sheet, you're the sucker.

matsemann 3y ago
It doesn't have to be a scam. The pie got bigger, but perhaps because other people added more stuffing (money) to it. So one's original piece remained mostly the same.
- ajross 3y ago
  The point is that with public securities, the SEC makes sure that it's not a scam. A public company can't just decide one day to issue a ton of stock and hand it over to an arbitrary entity, there's a regulatory process and legislated veto power held by the shareholders/board. When you buy an unregulated security (like shares in a "crowdfunded" startup), that's the protection you're not getting. Most people in this community tend to see the SEC as the enemy, but this is the value it provides.
  - matsemann 3y ago
    Hmm, where I live at least (not US) the company still have to act in a way that's in the interest of its owners. They can't do shady stuff just because they're not publicly traded. Or, they can, but it's not any more legal.
    - robbintt 3y ago
      You can sue in the US but there's really no case for OP. The company is "trying its best to deliver value".

NhanH 3y ago

Practically speaking, when getting stocks/ stock options in startup, you have to trust the integrity of the founders to the point not only for them to do the right things, but to fight for it. Preferred stocks (which VC gets) + dilution means there are a lot of ways to screw over common stocks, and at time when liquidation (that isn’t IPO) happens, a lot of lawyers will have the jobs of minimizing your stake. Which is to say that crowdfunding stock is a baaaaaaaaad idea. You are faceless to the founders, hard to see a scenario when things can go right.

iambateman 3y ago
For sure. Meanwhile this latest round raised $12M from 5,600 investors in a couple days. So the management team is getting a massive signal that “this is good.”

oezi 3y ago

Investing in any VC investment as a crowd investor at a valuation of more than 5m-10m is a near certain recipe for disaster.

303uru 3y ago

Preferred stock. IE the rich get to dilute their risk by passing it on to you!

blitzar 3y ago

What was The Founders’s ownership share diluted down to? It wasn’t. What was Peter Thiel’s ownership share diluted down to? It wasn’t. What was your ownership share diluted down to? Point-zero-three percent.

jsmith99 3y ago

Rule #0: before investing in a privately held company make sure you understand the capital structure and obligations and if there are classes of investor with guarantees or seniority.

hn_throwaway_99 3y ago

There are other replies saying you were "scammed", but just examine your own statements to see how something had to give (in this case, the common stock valuation) for anything to make sense. That is, look at your statement (emphasis mine): > Fast forward two years and they raise again…this time at a valuation of $170M. Naturally, I assumed my $500 was worth close to $1500 on paper. If they raised again, it's completely nonsensical to think your stock would have tripled in value. The only way to assume that's even possible is if the company tripled in value without raising more money. After all, "raising" is just another word for selling part of the company to other, new shareholders. When you sell part of something, that means the existing shareholders own less (as a percentage) of it. Yes, there are other bad tricks companies can play with different share classes and obscene preference rights for preferred shareholders (1x is pretty standard and totally fair in my opinion, anything more than that means to me that the company needed to raise under duress or has bad management). In other words, the outcome you described seems perfectly reasonable just by the rules of math. It says to me that many people just don't understand that "raising money" means selling a part of your company.

iambateman 3y ago
For sure, I think I was a sucker, not that the company was acting outside of the law. In this case, I’m learning that my perspective on dilution is different from the founding team, who evidently feel fine tripling the share pool - as they should! Their odds of a major exit go up with millions in the bank, and the market is willing to bear that dilution, so of course they dilute. Meanwhile, I end up feeling like I would have been better off buying $450 worth of Dogecoin and a really big pack of oatmeal crème pies.

username135 3y ago

Everyone tries to get cute with financial strategies and investments, chasing those huge returns. You would be hard pressed to consistently beat the returns of a market fund over the life of your portfolio.

jboy55 3y ago

To correct, the Fair Market Value of the common stock went from $4 to $4.75. Saying "Price" indicates you can sell at that value, you most likely can not sell your stock for any price right now. You should value those shares at 0 in your future financial planning. tldr; You bought $500 in lottery tickets with an undetermined draw date in the future with a high chance that it won't happen.

iambateman 3y ago
Yea, I understand your point. Price is convenient shorthand for funny money. You’re right that I probably lit my cash on fire.
- jboy55 3y ago
  Hey, I spent 6 years at a company collecting over 200k options, spending $2k exercising and having new money come in and try a 200:1 reverse split. Now, 15 years later, I'm a proud owner of common stock in a private company that is marginally profitable.