If you’ve ever invested in stocks, you’re familiar with the traditional way of acquiring company shares, purchasing publicly listed equity on the stock exchange. However, an increasing number of investors are looking to acquire private equity as an alternative option of investing.

Why are some investors turning towards private investing, and is it an option that you should consider, too?

This informational article will explore equity investment in privately held companies, how it works, and all the potential benefits and considerations compared to stock investments in publicly traded companies.

How Private Company Shares Work

As with all stocks, private company shares represent a unit of ownership interest in the company. However, they’re not listed on the stock market and aren’t publicly traded, meaning that any purchase or sale has to be approved by the company.

In contrast with publicly traded stocks, private company shares are typically intended for long-term investment and may require a commitment to the company and its growth, though they can be volatile and involve significant risks. Since they’re not easily traded, investing in them signals a commitment to the company and its goals, as their value is closely tied to the company’s success. More often than not, they’re also a way to gain influence in the company’s decision-making structures.
Private company shares are usually granted to employees as a reward for their service, given to investors in exchange for funds, or acquired through stock options.

Benefits of Owning Shares in a Private Company

Some of the most significant potential benefits of owning shares in private firms include:

• Potential for higher returns: Private equity has, in some cases, reported strong performance compared to public equity over various timeframes. For example, the Pitchbook North American Private Equity Index has shown higher returns after a five-year term compared to S&P 500 stocks. However, these results are not guaranteed and may not apply to every investment. Owning shares in private companies can offer higher returns, but it comes with higher risk, lower liquidity, and greater complexity. It's suitable primarily for investors with a long-term horizon, high risk tolerance, and the ability to assess or access high-quality opportunities. Past performance does not guarantee future results and that private equity can also lead to significant losses
• Dividend income: It’s possible to receive regular dividend payments from a private company, depending on its profitability and distribution policies—but it's not common or guaranteed like with some public dividend stocks
• Decision-making influence: Major shareholders in private businesses may have voting rights on major decisions and the opportunity to vote for a board of directors. This level of involvement may appeal to investors who want to contribute to the company’s strategic direction or governance.
• Portfolio diversification: Owning shares in private companies may help diversify your investment holdings beyond public markets. This diversification may reduce reliance on public market trends and offer exposure to sectors or innovations not typically available through public equities.

Risks and Challenges of Private Company Shares

Despite the benefits, there are some significant downsides to consider before deciding to opt for private investments:

• Limited marketability: You typically cannot trade private stock without board approval, which reduces its liquidity.
• Dilution risk: New funding rounds may bring in additional investors, which could result in new shares being issued and a lower ownership percentage for existing shareholders.
• Limited transparency: Private companies are not subject to the same disclosure requirements as public companies, which can make it difficult to assess the value of an investment.
• Legal restrictions on investment: Non-accredited investors may face limitations on their ability to participate in certain types of private offerings, depending on regulatory requirements.

How to Invest in Private Company Shares

To directly invest in private company shares, you generally need to be an accredited investor, for which the financial requirements are an annual income exceeding $200,000 or a net worth of over $1 million. If you’re new to investing, you may not meet these criteria.

However, there are alternative paths that may provide access without the same threshold requirements. These include:

• Investment trusts: These publicly listed funds may invest in both private and public companies. Some private equity trusts specialize in private companies and may offer exposure without requiring accreditation.
• Venture capital trusts: These operate similarly to general investment trusts but often focus on startups and smaller firms. Investors may gain exposure in exchange for minority stakes.
• Crowdfunding: Regulation Crowdfunding (Reg CF) allows companies to raise funds from the public through online platforms, such as StartEngine. Investors pool money in exchange for equity or other financial interests. Each offering is subject to SEC regulations and investment limits, particularly for non-accredited investors.

Private Company Shares vs. Public Stocks

Public stocks may be more appropriate for short-term investments. Their high liquidity, streamlined transactions, and broad availability make them appealing for those interested in market-based strategies or trading flexibility.

Private shares, on the other hand, are typically intended for long-term commitments. The characteristics of private shares, such as limited liquidity and complex transactions, require careful consideration to determine if they align with an investor’s financial goals and risk tolerance.

Although risks may be higher in case of business failure, some investors may find that investing in private companies aligns with their personal interests or long-term objectives.

Learn more about private company investment opportunities through platforms like StartEngine

Although private equity investment involves a more complex entry process compared to public stocks, Regulation Crowdfunding platforms may offer more accessible paths for eligible investors.

Platforms such as StartEngine operate under SEC rules and allow individuals to review and invest in startup companies in exchange for equity. These offerings are subject to investment limits and disclosure requirements set by the SEC.

Interested investors may explore offerings on StartEngine, but should take time to review the offering circulars and consult financial professionals if needed. All investments involve risk, including the potential loss of principal.

Conclusion

Investing in private company equity may appeal to individuals interested in long-term opportunities, portfolio diversification, or participating in early-stage business growth. While private investments are not as liquid or accessible as public stocks, they offer a different set of considerations and potential outcomes.

As with any investment decision, it’s important to understand the risks, review offering materials carefully, and evaluate whether private equity aligns with your financial goals and risk tolerance.

Disclaimer: This article is for informational purposes only and does not constitute investment advice or an offer to buy or sell securities. Investing in private companies, including through platforms like StartEngine, involves risk, such as loss of principal, limited liquidity, and regulatory restrictions. Past performance is not indicative of future results. Investors should review all offering materials, including those available on StartEngine, and consider consulting a licensed financial professional before making investment decisions.

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