Types Of Securities
Types Of Securities
Why do I care about the different security types available to me? Now that you are finding your inner venture capitalist, its critical that you understand what you are investing in! Not all investments are the same. When making an investment on the platform it is essential to understand the type of security you are purchasing and its advantages/disadvantages.
Purchasing Equity Vs. Purchasing Debt
When learning about types of securities, it is best to understand the difference between purchasing equity and purchasing debt. Both of these securities are offered on the platform and it is critical to understand the difference.
Let’s start by exploring the basics of equity securities. When you purchase equity, you are becoming a partial owner of that investment. The number of shares you purchase, therefore, equates to a percentage of the company that you own! Therefore, as that company performs better and better, so does your investment. The potential upside of equity securities tends to be greater than that of debt securities since the potential growth of a company is technically unlimited. The inherent risk in investing in an equity security is that if the venture fails all together, the equity owners are often the last to be paid. You are, therefore, risking the loss of your entire investment on the belief that the company you invested in will perform well in the future.
Debt securities differ from equity securities in that companies are borrowing investor funds with the promise to repay the loan with a set rate of interest until the debt is repaid. Therefore, when purchasing a debt security, you are generally loaning your investment in exchange for a rate of interest set when the security is issued. The higher the risk of the debt security, the higher the rate of interest tends to be.
We will now dive a bit deeper into equity securities to explain the various types of equity securities and what each entails. There are two types of equity securities: Common Stock and Preferred Stock. Each of these are explored in more detail below:
Common stock is the most common and simple type of equity securities. These investors are often given voting rights with their investment, however these voting rights are usually less influential than the voting rights provided to individuals holding preferred equity.
Preferred equity is typically issued to outside investors because it grants special rights and protection. This includes provisions such as anti-delusion rights. Additionally, increased influence on company decision-making is often included with these investments. Preferred equity holders are also able to claim their portion of a company’s assets prior to investors holding common stock.
Similar to equity securities, debt securities also have multiple types in addition to the basic debt equity described above. These additional types of debt securities are described more thoroughly below:
Convertible notes are debt securities that convert into equity. This usually takes place during a future financial round. However, there is no guarantee that the qualifying transaction to trigger your purchase of equity will occur. This form of debt typically offers interest accrual.
Simple Agreement For Future Equity (SAFE)
During a Simple Agreement For Future Equity, you are purchasing the right to buy equity when the financing round occurs. This occurs faster than with convertible notes. There is also no maturity date, which means there is no extra work required if an extension is required. Generally, the debt converts to common stock. However, some downsides include: No accruing of interest, no dividends or voting rights, and no maturity date.
The Bottom Line
Although there are many different types of securities, none are better than the rest. Each type of security could be best for a particular investor depending on the amount of risk they are willing to take on and additional rights/privileges they are looking to receive.
The main take away for all investors on the platform, is that crowdfunding involves many types of securities and it is important for you to read the subscription agreement for each issuer prior to investing. This will clearly spell out the offering including the securities you are purchasing and all special rights/privileges or voting power you will receive with your investment.