What do an accredited investor searching for a unique investment and a startup employee with an opportunity to buy stock options have in common? They can both stand to profit from Equitybee.
Startup companies often hire visionary employees willing to sacrifice security and higher pay in exchange for the ability to help build something from the ground up. As an incentive, the business will often give its startup employees the ability to purchase stock options.
Unfortunately, many startup employees don’t have the financial means to exercise their stock options. That’s where Equitybee comes in.
In this Equitybee review, I’ll explain how the platform works for startup employees and investors. I’ll cover the key features, pros, and cons and let you know how you might benefit from signing up with Equitybee.
Table of Contents
What Is EquityBee?
Equitybee’s goal is to give startup employees the financial means to purchase those stock options when they otherwise wouldn’t be able to do so.
How Does Equitybee Work?
Equitybee provides opportunities for both accredited investors and employees of startup businesses. Here’s how the process works.
- If a startup employee is offered stock options but can’t afford to exercise them, they can approach Equitybee.
- If Equitybee approves your request, they’ll present your offer to its list of accredited investors.
- Interested investors will make you an offer.
- When you accept an offer, the investor will provide the funds necessary to exercise the stock options.
- If and when an “exit event” occurs (merger, IPO, the company is sold), the employee can exercise the options, and the investor gets a share of the profits based on what was agreed to in the offer.
I’ll get into the pros and cons a little later, but there is no risk to the employee if the deal never goes through. Signing up for Equitybee is free for employees, but you will pay fees upon the successful exit of your stock options.
In addition, you’ll pay interest on the amount you borrowed from the investor, likely between 1% and 4%.
As an investor, it’s also free to join Equitybee. However, you will pay a 5% upfront platform fee and a 5% carry fee if and when successful liquidation occurs. You’ll also gain the interest that the employee is required to pay you for the loan/investment.
If you’re an employee who’s been offered a chance to purchase stock options but is low on funds, Equitybee may be able to help you.
They’ll locate investors who are interested in funding your purchase of stock options in return for a share of future potential profits.
When you exercise your options, either through a merger or an Initial Public Offering (IPO), and choose to cash out, you split the profits with your Equitybee investor.
In the event that the business fails, you have no further monetary or other obligations. The entire risk falls on the investor.
Equitybee gives investors access to “high-growth, venture capital-backed startups.” Because you’re buying at prices based on past company valuations, you have a unique opportunity for profit.
These highly speculative investments are available only to accredited investors.
As a reminder, to be considered an accredited investor, you must meet the following qualifications:
- Minimum $200,000/year income (or $300,000 combined with a spouse) for the past two years that is expected to continue in the current year; or,
- Net worth exceeding $1 million, not including your primary residence; or,
- The achievement of certain specific professional criteria as defined by the SEC
Remember that by investing with Equitybee, the potential exists for you to lose your entire investment.
Because Equitybee deals with startup businesses, the possibility of the business going belly up is real. If that happens, you’ll lose all of the money you invested in the company.
Another thing to consider is that the investor never actually owns options or shares. The ownership remains with the employee.
Key Features of Equitybee
- Equitybee is free to join
- Obtain funding for stock option purchases
- Pay interest on the investor’s contribution amount.
- No financial implications if your company goes out of business
- Exercise some or all of your stock options.
- Share the profits with your investor
- $10,000 minimum investment
- Accredited investors only
- 5% upfront platform fee (deducted from your initial investment)
- 5% carry fee if/when successful liquidation occurs
- Potential for loss if the stock options cannot be exercised
Equitybee Pros and Cons
Equitybee has several pros and cons you should consider before investing in the company or utilizing it to help you take advantage of your company’s stock option program.
- Free to join
- Access to an otherwise inaccessible asset class
- Opportunity to purchase stock at low prices
- Potential for attractive returns
- Accredited investors only
- High minimum investment ($10,000)
- High-risk (investing in startups that may not make it)
- You never own the shares
- No upfront fees
- Provides an opportunity to take advantage of stock options
- Employee maintains ownership of options
- No risk if no “exit event” occurs
- You have to give a percentage of your stock options to the investor.
- You’ll make less than if you were able to self-fund your stock options
Although there aren’t currently any investment companies that work quite like Equitybee, there are a couple that work similarly. Here are rundowns on each of the two we’re featuring here.
Mainvest is a crowdfunded lending platform for small businesses and startups.
As an investor, you can help fund one or more of the businesses listed through Mainvest. In return for your investment (a loan for the business owner), you receive your initial investment back plus a predetermined multiple.
For example, if the offered multiple was 1.5, and you invested $1,000, you’d receive $1,500 back at the end of the term of the investment.
You do not have to be an accredited investor to invest with Mainvest. Each investment has its own minimum investment threshold.
It’s not uncommon to see investments with minimums as low as $100. When you view available investments on Mainvest, you’ll have access to the following information:
- The purpose of the loan (investment)
- The loan term
- The investment multiple (profit)
- How much has been raised thus far
- The business’s target goal
You’ll also be able to read company updates, peruse the discussion forum, and more. Mainvest does collect fees on financing deals, but those fees are paid by business owners.
The difference: The main difference between Mainvest and Equitybee is that with Mainvest, you own a security share in the business. With Equitybee, the ownership of the stock remains entirely with the employee.
While the employee is required to sign a contract stating they’ll give you your commission in the event of liquidation, it’s not a loan, and so there’s little recourse if they back out. (Equitybee does vow to take legal action in the event of a contract breach).
Mainvest is registered with the SEC and is a member of FINRA.
For more information, check out our full Mainvest review.
StartEngine works similarly to Mainvest as it helps you invest in startup businesses. You can also use StartEngine to invest in art and collectibles.
StartEngine offers many investments with a minimum investment amount of $100. The site allows both accredited and nonaccredited investors to invest.
Note that there are fees when you invest with StartEngine. The company charges a 3.5% processing fee to investors when they buy in, though with some offerings, the startup company will pay the fee.
There is also a 5% transaction fee when you sell your shares on the site’s secondary market.
StartEngine offers a premium membership called Owner’s Bonus that costs $275 per year. The membership gives you 10% bonus shares on every investment you make.
You’ll also get 20% off of the 5% fee if you sell shares on the secondary market.
It’s important to note that StartEngine offers long-term investments only. And although you can sell your shares in a business or collectible back to the company, you should be prepared to hold your investment for at least five years if you want to earn a profit.
Like Mainvest, StartEngine is a crowdfunding platform that is registered with the SEC and is a member of FINRA.
Equitybee offerings are offered through Equitybee Securities, LLC. Equitybee Securities is a member of FINRA and SIPC.
Equitybee takes several steps to mitigate risk to investors. First, employees with stock options to invest in are subject to thorough background checks and credit checks.
The company also verifies the validity of the stock option package, maintains close contact with the employee, and has the employee sign a legal contract.
As an investor with Equitybee, it’s important to know that the potential exists for the liquidity of the stock shares not to happen. The company may not have a merger, IPO, or another liquidation event, or the company may go out of business. Lastly, the employee may breach the contract.
No. Equitybee doesn’t raise funds for companies. Instead, they help employees exercise stock options when they might not be able to otherwise.
Equitybee Review: Final Thoughts
Equitybee offers a chance for investors to take part in stock option packages from company startups. Invested funds are used to fund employee purchases of stock options, with the promise of potentially higher future returns.
While the platform is only open to accredited investors, that’s probably a good thing, as the nature of the investment, including its high risk profile, isn’t suitable for most regular investors.
Risks aside, the potential for profit is very high. So if you’re looking specifically for investment opportunities for accredited investors with a potential for high return, consider adding Equitybee to your diversified portfolio.
- Potential for attractive returns
- Access to a new asset class
- Zero upfront fees for employees
- No risk to employee if no "exit event" occurs
- Accredited investors only
- Dealing with startups is high risk
- Purchasing options, not shares of stock
- High-risk investment