Investors Knowledge Base

Risks Associated with Equity Securities

Equity Comes Last in the Capital Stack: The holders of the equity interests stand to profit most if the company does well, but stand last in line to be paid when the company dissolves. Everyone – the bank, the holders of debt securities, even ordinary trade creditors – has the right to be paid first. You might buy equity hoping the company will be the next Facebook, but face the risk that it will be the next Theranos.

In Most Cases, You Will Be A Minority Investor : Investors will typically be “minority” owners of companies on Fundify, meaning that other parties will have complete voting and managerial control over the company. As a minority stockholder, you typically will not have the right or ability to influence the direction of the company. You will generally be a passive Investor. In some cases, this may mean that your securities are treated less preferentially than those of larger security holders.

Possible Tax Cost : Many of the companies on Fundify will be limited liability companies. In almost every case these limited liability companies will be taxed as partnerships, with the result that their taxable income will “flow through” and be reported on the tax returns of the equity owners. It is therefore possible that you would be required to report taxable income of a given company on your personal tax return, and pay tax on it, even if the company doesn’t distribute any money to you. To put it differently, your taxable income from a limited liability company is not limited to the distributions you receive.

Your Interest Might Be Diluted: As an equity owner, your interest will be “diluted” immediately, in the sense that (1) the “book value” of the company is very likely to be lower than the price you are paying, and (2) the Founder of the company, and possibly others, bought their stock at a lower price than you are buying yours. Your interest could be further “diluted” in the future if the company sells stock at a lower price than you paid.

Future Investors Might Have Superior Rights: If the company needs more capital in the future and sells stock to raise that capital, the new investors might have rights superior to yours. For example, they might have the right to be paid before you are, to receive larger distributions, to have a greater voice in management, or otherwise.

Dilution of Voting Rights: Even if you have any voting rights to begin with (and many of the equity securities offered on Fundify will have no voting rights), these rights will be diluted if the company issues additional equity securities.

Our companies will not be subject to the corporate governance requirements of the national securities exchanges: Any company whose securities are listed on a national stock exchange (for example, the New York Stock Exchange) is subject to a number of rules about corporate governance that are intended to protect investors. For example, the major U.S. stock exchanges require listed companies to have an audit committee made up entirely of independent members of the board of directors ( i.e., directors with no material outside relationships with the company or management), which is responsible for monitoring the company’s compliance with the law. Companies listed on Fundify typically will not be required to implement these and other stockholder protections.