CEOWorld Magazine excerpt from Growth Your Wealth Faster With Alternative Assets.

When it comes to making alternative investments in equity, it’s helpful to think about it in terms of the stage of the company you’re investing in and the type of equity capital you will hold. Equity can be defined as investing in private companies that are not listed on an exchange or investing in a public company to take it off an exchange and make it private.

Private companies have lower disclosure requirements and are typically harder to value and often require thinking and metrics outside the traditional valuation multiples and DCF (discounted cash flow) methodology.  It’s often a strategy about backing management and management teams and their visions more so than financial metrics.  Let’s start by looking at the various stages of equity capital sourcing, which can be thought of as angel, seed, growth capital, pre-IPO and traditional private equity.

Angel stage

Angel investing could be the result of a wish and a dream. The business doesn’t exist (yet), but it’s a nice idea. What matters for an investor at this stage is everyone’s background. If you are going to believe in their dream, ideally, it will be in a sector in which they have some experience. Have they started businesses before? Were they successful or close to successful?

Seed stage

Seed investing is the next part of the journey. At this stage, you have invested time and effort and there are a few dedicated people involved, probably a couple of full-time staff or founders who aren’t earning much money because they’re trying to live out their dream. You’re trying to raise some money to take your rough design to the point where it’s potentially commercial.

Growth capital

Growth capital is sort of an interim step. It’s where businesses have spent a lot of their capital, have likely invested significant sweat capital and simply need more to grow. They may have spent their initial round of capital from the angle and seed stages and only be halfway through building a commercially viable product.

Pre-IPO (initial public offering)

This is the nearly grown-up phase. Business is chugging along, and the founders think there could be an exit coming; however, but the business needs some capital to accelerate into an IPO. Growth capital and pre-IPO are quite attractive investment opportunities because you can see a more predictable path and distribution of potential outcomes and exits.

Private equity stage

Taken literally, this could be defined as any equity in a private company. Although the term ‘private equity’ typically refers to a stage of the investing cycle, it tends to be quite a strategic stage where a reasonable-sized investment is made by the private equity firm. The investment usually comes with some control from both an equity ownership percentage and seats on the board.

Next, we will look at the many types of equity capital you can invest in from straight equity to preferred and deferred equity.

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