Earning a Return

How do I earn a return?

The amount you may earn depends on the type of investment contract the company is offering.

There are four classes on Wefunder:

• Debt. Some local businesses offer a simple loan or revenue share. A simple loan, just like your car loan, has a fixed repayment schedule known in advance. Unlike a loan, a revenue share returns a fixed amount of money (such as 2X your investment), but the time it takes to repay depends on how well the business does. The faster the business grows revenue, the faster you earn a return, and the higher your effective interest rate.

• Convertibles. Most early-stage technology startups use a Convertible Note or Simple Agreement for Future Equity. These will convert your investment to stock at a later date if the company raises a "priced round" from major investors, most often venture capitalists. At this point, you are a shareholder owning equity, and you earn a return if the value of that stock goes up over time, and you are able to sell it.

• Stock, No Dividends. When a startup is at a stage where they can afford to pay lawyers tens of thousands of dollars, they will do a "priced round". Like the stock market, you are buying equity at a fixed price per share (or unit for LLCs). 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. Then you earn a return.

• Stock, Dividends. While a tech startup almost never offers dividends, a later-stage local business - such as a brewery opening a second location - often will. The type of dividend can vary. Some might offer a fixed dividend per share per year. Some might offer a percentage of profits. A common scenario is also to "swap" the dividend after your investment is repaid. For instance, a brewery might share 80% of its profits until the investors are repaid, and then 20% thereafter in perpetuity.

How long until I see a return?

The amount of time it takes to see a return is highly dependent on the type of investment contract.

• Debt. A simple loan will define the number of months until it is paid back. For a revenue share, it depends on their projections for future revenue. The faster the business makes money, the faster you will see a return.

• Convertibles & Stock with No Dividends. You are waiting until the company goes public or is acquired. This can take a very long time. It took the early investors in Harmonix (the creators of Guitar Hero) over 10 years to earn a return.

• Stock with Dividends. This depends on the specific investment agreement. Typically, dividends are a percentage of profits. Therefore, the amount of time to see a return depends on how profitable the business is.

How is the valuation determined?

Market demand determines the valuation. 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.

In order to get a sense if a valuation seems reasonable, look at who the Lead Investor is. How experienced are they? How much did they invest under the same terms? Wefunder is in the process of requiring that each company identifies the Lead who helped set the valuation.

Where can I get more advice on how to invest wisely?

One of the best early-stage investing firms - measured by objective returns - is Y Combinator. They were the first investors in Reddit, Dropbox, Airbnb, Stripe, and over 100 more startups now worth over $100 million.