Risks
Why invest in startups?
It shouldn't be to make lots of money! This isn't the stock market. Startups are much, much riskier and are likely to fail. Everyone has their personal motivations for investing in startups but ours is to support founders we believe in, pursuing a vision we care about, with a good chance of earning a return should that vision transform into reality.
Is an equity investment appropriate for me?
If you can't afford to lose every dollar you invest on Wefunder, the answer is no. If you can't afford to wait 7+ years for a return, the answer is also no.
You might have a strong belief in the future success of a company, but it's safer to think of an equity investment more like a lottery ticket that might pay off in the very long term.
Unlike the stock market, investment outcomes are much more binary (complete failure or wild success) and there's no stock market that'll allow you to easily re-sell your investment stake to someone else, unless the company is acquired or prepares for an IPO.
Is a debt investment appropriate for me?
Compared to equity investments, loans can be slightly less risky but also have less of an upside. You should still assume that even a loan will not be paid back. Never invest more than you can afford to lose. Otherwise, Wefunder is not appropriate for you.
Just how risky are startups?
Very! You should not allocate more than a few percent of your investment portfolio to startup investing. You should never invest so much that it would impact your lifestyle or retirement plans if your entire investment is lost. Every investment listed on Wefunder is much riskier than a public company listed on the stock market.
How can I decrease the risk?
You are more likely to avoid loss by diversifying your investments, focusing in areas you have expertise in, and investing in startups you are a passionate user of. Even professional investors have a hard time predicting exactly how startups will earn money in the future (e.g., Google in 1999). Investing in what you know and find personally valuable is an important signal of a good investment.
How many investments should I make?
We recommend making a bunch of small investments each year, rather than one large one. For instance, if you decide you can safely invest $5000 per year in startups, it'll be less risky to make ten $500 investments instead of a single $5000 one. You should never invest more than you can afford to lose.
Can I easily re-sell my investment?
It's safest to assume you cannot resell your investment to another investor. First, there is not yet a liquid secondary market like the New York Stock Exchange for private companies. Second, almost every equity security on Wefunder prohibits resell, as private companies carefully guard the number of shareholders on their "cap table". Third, Regulation Crowdfunding specifically prohibits resale of securities for one year, except to the issuer, an accredited investor, a family member or their trust.
Will my percentage ownership be diluted?
Yes. An equity stake will almost certainly be diluted.
Successful startups host multiple series of financings, all the way to IPO. For each financing, the startup issues additional stock to the new investors. As long as the value of the company increases with each funding round, this is healthy and normal. For example, the first investor in Facebook, Peter Thiel, originally purchased ~10% of the company for $500,000. By 2011, that stake was diluted down to under 3%, but estimated to be worth ~$2 billion.
Sometimes, when things are not going well, the startup is given the option of going bankrupt or raising more money in a "down round", which means the value of the company decreased since the last financing. This is very bad for the founders and past investors alike; the dilution happens much more rapidly. But it's preferable to the startup going bankrupt and the investors losing everything.
Will my investment have voting rights?
It's rare for an investment on Wefunder to offer voting rights directly to smaller investors because founders fear it can scare off venture capitalists who invest in later rounds, due to the hassle of collecting thousands of signatures. You should assume your investment does not include voting rights unless specified otherwise. Your stake will almost certainly be diluted when companies raise follow-on funding.
How to Invest
Which startups should I fund?
Wefunder is designed to be a platform connecting investors with startup founders. Wefunder does not recommend you invest in any particular startup, even if a startup appears to be more featured on wefunder.com. In an effort to reduce fraud, we apply standards when deciding which startups can fundraise on Wefunder, but you should conduct your own due diligence to decide which startups, if any, are right for you.
The information regarding companies on Wefunder is provided by the companies themselves. Wefunder may assist a company in presenting this information, but we don't verify its accuracy or endorse the company. If you're investing through a WeFund, be sure to also read the fund's offering documents. If you have any questions, ask at [email protected]!
How should I conduct due diligence?
You are responsible for conducting your own due diligence. Groups of prospective investors working together are more likely to discover issues with a startup: the "wisdom of the crowd" at work. When companies are fundraising, investors are highly encouraged to ask detailed questions. If the founder gives answers that are not convincing, then you shouldn't invest!
How much am I allowed to invest?
It depends on which Regulation the company is fundraising with.
For Regulation Crowdfunding Offerings, Wefunder calculates your annual investment limit based on the net worth and income provided upon account opening. Investment limits are for every 12 month period. Every investment in a Regulation Crowdfunding offering counts towards the annual limit. We will not let you invest greater then this amount. The SEC made it pretty complicated on how this number is calculated, but if you're curious:
- Everyone can invest at least $2,200
- If either your net worth or income are below $107k, you may legally invest a maximum of 5% of the lesser number.
- If both your net worth or income are above $107k, you may legally invest a maximum of 10% of the lesser number.
- No one may invest more than $107,000. Accredited investors are subject to the same investment limitations as everyone else, no matter how silly that is.
For Regulation D offerings, only
To find out your investment limits, open an investor account.
Can non-U.S. Citizens invest?
Yes, unless the law of your country prevents you from investing.
How do I apply to invest in a company?
If a company is fundraising on Wefunder, and you are eligible to invest, there will be a big green "Invest" button near the top of the profile. Indicate how much you'd like to invest, choose your payment method (we support credit cards, bank accounts, Bitcoin, wire transfers, and checks), then sign the contract.
Note that not every company listed on Wefunder will be fundraising. If you are interested in a company that has not yet decided to fundraise, you can follow them instead. You'll be notified via e-mail if they fundraise on Wefunder.
I applied to invest. When do I hear back?
You'll usually hear back within a day, unless there's special circumstances. No money will leave your bank account until your application has been accepted and both parties have signed the contract. The size of your investment may be reduced to a lower amount or may be rejected.
I've been "waitlisted". What's that?
Investors are often waitlisted when startups receive more money than they need (i.e., the round is oversubscribed). Instead of reducing the size of everyone's investment, founders (or Wefunder, in the case of a WeFund) may choose which investors to accept, and may prioritize those who can help their company the most. You can decrease your chances of being waitlisted by applying to invest early, connecting your social networks, and filling out your profile.
My application is accepted. Now what?
You have 7 days to ensure payment is sent to an escrow account. If this time expires, your investment application will be automatically canceled. Your funds will be held in an escrow account until the fundraising target has been met and the round closes. Your funds are then transferred to the startup and your investment is fully confirmed and executed.
How are contracts signed?
Everything is handled electronically. After signing contracts on Wefunder, you'll be emailed a PDF of the executed documents signed by both parties. A copy of your contract is also always available on Wefunder.
Do my funds go in an escrow account?
Yes. Your investment is placed in an escrow account hosted at Boston Private Bank. For Regulation Crowdfunding offerings, funds are transferred to the startup only after the fundraising target has been met and the round is closed.
Regulation D offerings only available to
What happens when rounds are oversubscribed?
Sometimes, more money is committed than a startup can accept. In this case, priority for who becomes an investor is generally placed in the order that the funds have been received in the escrow account. However, there are some exceptions. Sometimes startups may prioritize those they feel can help their company the most, and allow those investors to "jump the line". You can increase your chances of becoming an investor by filling out your profile and connecting your social networks.
How are securities delivered to me?
After an investment is successfuly executed, you will recieve an e-mail with your electronic contract signed by both parties. All of your contracts are always hosted on Wefunder at your portfolio screen.
How is Wefunder compensated?
For Regulation Crowdfunding, Wefunder charges investors up to 2% of their investment (minimum: $7, maximum: $75). We also charge the company up to 7.9% of their total funding volume for Regulation Crowdfunding.
For Regulation D, Wefunder charges up to 20%
For Regulation A+, Wefunder does not charge any fees.
Cancellations
I changed my mind! Can I cancel my investment and get a refund?
Yes. You can change your mind at any time before the fundraise closes, even if you've signed the investment contract. You'll receive a full refund, for any reason. You'll recieve a 5 day notice when a fundraise is about to close.
Are there any limitations on canceling an investment?
No. While your funds are still in the escrow account, and if the fundraising round has not been closed, you can cancel your investment commitment anytime, for any reason.
Can the company cancel my investment?
It's rare, but yes. Your investment may be canceled if your funds are still in escrow: startup founders have the same cancellation rights that you have. Legally, startups can cancel your investment for any reason, but a more typical example would be if they discovered you worked for a major competitor.
After the fundraising round is officially closed, and the startup has accepted the funds in the escrow account, your investment cannot be canceled.
When will the fundraising round close?
A fundraising round will close at their offering deadline. However, a round may close earlier after their funding target has been met. In this case, you will receive a 5 day notice before the close date via e-mail. (Also, every round is open at least 21 days).
What happens if the fundraising fails?
You'll be notified via e-mail and receive a full refund of your investment, along with any administrative fees you've paid.
How long will it take to receive my refund?
It depends on the method by which you've paid. We'll initiate a refund as fast as possible but it can take up to 14 days.
Investor Updates
What updates should I expect after investing?
You should not expect too much communication with founders. After all, you want them busy running their company, not talking to hundreds of investors all day. Wefunder encourages companies to update their investors once per quarter, but they are under no legal obligation to do so. The law under Regulation Crowdfunding requires that most companies issue an annual report.
How can I help the startups I invest in?
Most of the fun from investing in startups comes from how you can help them! You can offer product feedback, introduce founders to relevant people in your network, or evangelize product launches. Founders will often publish specific requests for help to their feed as well.
Do I have direct access to the founder?
No. We don't hand out their email addresses or phone numbers. All communications with founders are handled via the Wefunder website.
Will I receive an annual report?
If you are an
If you are an investor in a Regulation Crowdfunding offering, the company will issue an annual report once a year with financial statements and a discussion of its business, no later than 3 months after the end of their fiscal year. Companies are not obligated to file annual reports if they file for an IPO, are acquired by a purchaser, repurchase your investment, have fewer then 300 shareholders after 1 year, if they go bankrupt, or after 3 years if they have less then $10 million in assets. Some startups who can easily raise funding from venture capitalists may decide not to file annual reports, as the only penalty is they may not use Regulation Crowdfunding again until they do so. If a company stops reporting, you may not continuously have current financial information about the company.
Will the startup always use Wefunder in the future?
After fundraising, Wefunder provides the startup free continued access to our platform. But there is no guarantee the startup will continue to use our services. They may also decide to raise their next round of financing on a different funding portal.
Returns
How do I earn a return?
Most startups on Wefunder use a Convertible Note or SAFE. The note or SAFE can convert to stock if the company raises a "priced round" from professional investors. If the company is successful, the value of the stock can increase with each subsequent round of financing, until the company is acquired or goes public. At this point, you can sell your stock. If you invest through a WeFund, you will hold an interest in the WeFund instead of holding the company's securities directly. We will manage and sell the company's securities on your behalf, and distribute any proceeds to you upon such a sale. Of course, when investing in something as risky as a startup, there may be no return at all.
How is the valuation determined?
Market demand often determines the valuation. Typically, before a company fundraises on Wefunder, at least one professional investor has invested in the company. Professional investors are much more likely to understand the current market value of startups. This valuation shifts with time, depending on the amount of capital chasing startups. Right now, early-stage high-growth startups are often valued at $3 to $20 million for their first financing. Lifestyle businesses are valued at less. Companies that have raised several rounds of financing and are further along are worth far more.
How long until I see a return?
It could be a very long time and maybe never! It took the early investors in Harmonix (creators of Guitar Hero) over 10 years to earn a return. You are usually waiting until the company goes public or is acquired. If you invest through a WeFund, you may also hold interests in the fund for a very long time, but Wefunder will decide how and when to sell the stock, then distribute any proceeds to the investors in the fund.
WeFund SPV
What is a WeFund?
A few startups on Wefunder can raise funds from accredited investors with a WeFund under Regulation D. If this is the case, it will be clearly indicated on the invest page; otherwise, you are making a direct investment. A WeFund SPV is a series of an LLC that exists for the sole purpose of investing in one specific startup. All the investors pool their capital in the WeFund, which then invests as one entity in the startup. The startup only has one direct investor: the WeFund. If you invest through a WeFund, you will hold an interest in the fund instead of holding the company's securities directly.
Why do startups use WeFunds?
Startups use a WeFund SPV to ensure their follow-on financing won't be at risk. Venture capitalists are uncomfortable when startups have many small investors (they don't like collecting thousands of signatures). With a WeFund, all those smaller investors are represented by one large entity.
Who manages the WeFund?
WeFunds are managed by our fully-owned affiliate: Wefunder Advisors, an investment advisor.
Do I have voting or information rights?
No. All voting and information rights are proxied to the Moderator of the WeFund, Wefunder Advisors, which will act on your behalf.
How do you decide who gets to invest?
Wefunder determines, at our sole discretion, which investors to accept. We may decline an investor who runs a competitor to the startup, for instance. Sometimes ‘hot deals' are oversubscribed; in that event, Wefunder will give priority to investors who we feel can most help the company. Due to the 249 investor limit in a WeFund, we may also give priority to higher investment amounts.
What are the fees for a WeFund?
Wefunder is not compensated with any management fees or transaction-based revenue. Our compensation comes from
How does Wefunder make money on a WeFund?
We charge
When do we decide to sell securities?
The Moderator of the WeFund, Wefunder Advisors, determines at its sole discretion when to sell the securities and distribute returns to investors. Usually, we will hold the investment until the startup is acquired or has an IPO, which could take 4-7 years, if ever. In some circumstances, we may decide to sell the securities sooner, if we believe that will maximize returns. We will always act in the interests of the investors in the WeFund. Our compensation is directly tied to maximizing the value of the fund.
1) These numbers include startups currently live on Wefunder if they pass their minimum target.
2) Some startups use two different laws at the same time (i.e., Regulation D and Regulation Crowdfunding).
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