Investing In the Stock Market vs. Investing In A Startup
By Lior Ronen (@Lior_Ronen) | Founder, Finro Financial Consulting
The investing universe includes two parts that intersect on some occasions: the private and public markets.
There are significant differences between investing in the private and public markets.
In the public market, investors benefit from liquidity, structured processes, easy access, transparency, available information, and low transaction costs.
However, investing in the private market is the entire opposite of the public market: investments are not easy to liquidate, transaction costs are high (lawyers, accountants, bankers, advisors), lack of transparency, lack of available data. While the upside potential, in many cases, higher than the public market, it is significantly harder to access and succeed in private market investments.
The private market includes illiquid assets such as stocks in private companies, private loans, different debt vehicles, and real estate.
Unlike the public markets’ standard securities, the private market has no standardized securities. There are many conventions and common practices. However, since private market transactions are private transactions between two parties, they can agree on any terms they want, decide on, and meet the legal and regulatory requirements.
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These days, when access to public market investing is easier than ever through a bank’s website or a broker’s app, private market investing is harder to access for most people.
Even though platforms like SharesPost, Forge Global, and EquityZen try to make the private market investing process smoother, simpler, and more accessible than before, transactions are still available for accredited investors only and require additional legal, accounting, banking, and advisory services.
Not only that, the private market investing includes non-standard securities, limited public access, and high transaction costs compared to the public market; it is also less regulated.
A public company is required to publish audited financials every quarter, update the public on every material change in its business or event that might impact its financials, investors know the value of the company, and the number of shares the transactions made.
In the private market, a company is not required to release financial data to the public.
There are no legal obligations to private companies to update their investors every period, and financial data is not available in a click of a mouse for potential investors.
Moreover, investors in the secondary market, in which they purchase securities from other investors, not from the company itself, might have less access to data about the company than other investors.
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