For serial entrepreneurs that those who love a challenge, investing in a startup or other private equity deal is engaging, exciting and can be tremendously rewarding both personally and financially. In Seattle and other major tech hubs, the chance to fund what could be the next unicorn is hard to ignore, especially if the opportunity percolates up from your business network, an associate whose opinion you value, or friends and family who are industry innovators/leaders.
Before you act, realize that there are two aspects to analyzing a private investment: (1) The merits of the investment itself on metrics such as risk, potential return, discounted cash flow, and opportunity cost. As the chart above shows, private equity funds have a much wider dispersion in returns than regular stock mutual funds. That’s not surprising given the variety in quantity and quality of private equity investments, making due diligence critical. (2) How the investment serves your needs, goals and aspirations.
At LNWM, we help clients with both assessments, and we have seen that it’s in the personal assessment that people are most likely to be unaware of key things they should be considering. What kind of things? Taxes, liquidity, the potential use of trusts, how the investment is funded, and even titling of the investment. All these things can make a big difference in the outcome of a private equity deal for you personally.
If you invest in context of who you are, your finances and your needs, this greatly improves the chance that you make an investment on terms that work for you.
Read our paper The Case for Private Market Investments.