EquityZen Users Community/EquityZen F.A.Q.
How does EquityZen work: Key Features and Tricks
EquityZen is one of the most convenient investment platforms in the secondary market. As an investor, you’ve undoubtedly faced this question, “How does EquityZen work?”. I feel the same way :)
The advantages of this platform will be emphasized and compared with some alternatives (spoiler: the comparison is not in favor of competitors).
EquityZen allows investors to buy shares of private companies, acting as an intermediary broker between the investor and the seller of such shares.
Shares can be bought by accredited investors or qualified purchasers only. The sellers are usually either employees of private companies or investors of equity rounds, that is, shareholders included in the company’s Cap Table. EquityZen, in turn, deals with the issues of legal registration of the deals and monetary transactions.
In this article, I will analyze some specific features of the EquityZen platform, which are not well-known but very useful for investors. It will help you to clarify what EquityZen is and how to invest in EquityZen effectively.
KYC
One of the requirements for registering at EquityZen is a KYC (Know Your Customer) check. KYC for an investor includes aof questions about the sources and amounts of income, investment, risk strategy, and confirmation of identity and location.
Here’s a lifehack. You can participate in EquityZen deals for ANY amount WITHOUT needing KYC verification. It is possible through an LLC entity (which you should create or join). An LLC might be created by several investors who sign an agreement and deposit specific amounts to participate in a single EquityZen deal. Then this LLC buys an allocation on the EquityZen platform as a legal entity-investor and distributes it proportionally among the members following their shares. Thus, LLC members should not register at EquityZen and can buy shares for an amount less than the EquityZen minimum investment of $10k.
The Listing Process
The list of deals EquityZen users can participate in is constantly updated. EquityZen regularly adds both offerings of new companies and new offerings for companies that have already been on the platform.
New offerings appear on Tuesdays and Thursdays at 12:00 pm EST on the Listings page.
With this schedule and a firm idea of how does EquityZen work, investors have the opportunity to enter the platform promptly and look through new deals, choosing the suitable ones to reserve an allocation.
Here’s a lifehack #1. The best deals are used to be fully reserved very quickly, usually in 1–3 minutes, first come, first served. In this sense, it is beneficial to have a clear position at the time of listing — to invest in this company or not. So, it would help if you gradually form your priorities for the most well-known companies in the sphere of your interest. On the other hand, you can also subscribe to the newsletter of preliminary reviews on offerings to be listed on EquityZen, which is provided by side services (such as VC Assist). The subscribers receive a summary and scoring for all upcoming deals and can prioritize them in advance.
Here’s a lifehack #2. Suppose you want to invest in two or more EquityZen deals that simultaneously appear on the platform. In that case, there is a high risk of being unable to make it in time (while you reserve an allocation for one company, all the rest are committed by other investors). For such cases, you should create one or more additional accounts registered with relatives and friends. You can book allocations for different offerings from different accounts, and then ask your EquityZen manager to transfer the allocation to the main account (yours) or use joint investments.
Here’s a lifehack #3. There are no schedules for Express deals initiated by EquityZen investors themselves. To have time to participate in Express deals, you should set email or SMS notifications of their appearance; both functions are available in the account settings.
Waitlist & Watchlist
You can add companies whose shares you wish to buy to the Watchlist. It’s an excellent opportunity to filter your preferences — you can invest solely in trusted companies you added to your Watchlist.
Here’s a lifehack. In your email, you will receive advance notices about the upcoming listings for companies on your Watchlist. EquityZen sends such notifications 1–2 hours before the appearance of deals. You should, therefore, carefully follow your email and use the lifehacks from the previous paragraph. Thus, you will guarantee yourself enough time to book your allocation.
The Waitlist is created for those who want to book an allocation, but don’t have enough time. Investors enter the Waitlist directly from the offering page. Being on this list allows you to receive an allocation if one of the investors who reserved their allocation refuses for some reason to participate in the deal (does not confirm their intentions and does not click Submit within 71 hours after the commitment).
Here’s a lifehack. If a Waitlist appears for a deal, this can be seen as a sign of high investors’ demand. High demand, in turn, means that many EquityZen users liked the offering and are ready to participate in the deal. Thus one can assume that the Waitlist appears only for the best offers. It can be used as a simple indicator of the deal grade. No Waitlist — No Demand — Bad Deal..
EquityZen Fees
Processing of deals on EquityZen takes place in several stages:
- Commitment + Signing the Term Sheet (expression of intent to participate in the deal)
- Submission (confirmation of participation in the deal)
- Fund transferring + Taxes + Transaction verification
- ROFR checking
- Signing the Investor Agreement and other legal documents
There’s a lifehack. Cancellation of intention to participate in the deal (Commitment + Term Sheet) costs you nothing. Furthermore, your reservation will be cancelled automatically if you reserve an allocation and don’t proceed to the next stage. Cancellation of confirmed deal participation costs $500. EquityZen often makes concessions to investors and can forgive you this penalty if you can find arguments to prove that you confirmed the deal by mistake.
Types of Deals
A Standard deal is a regular deal carried out according to the standard EquityZen rules, when the platform independently finds allocations, negotiates with sellers, and handles legal aspects. Investors only reserve and pay for allocations, thus becoming shareholders (LP within the SPV Fund created by EquityZen).
Here’s a lifehack. One can quickly check the validity of the status of legal entities created by EquityZen through the LLC Registry from the SEC.
An Express deal is an opportunity for investors who bought EquityZen stocks/ shares 12 or more months ago to resell them to other users on the platform. The selling investor themselves sets the price and is defined by him solely (which is quite nice, isn’t it). The better the company and price, the higher the chance is to sell your shares.
Here’s a lifehack. If for some reason, you no longer want to be a shareholder of the company, you don’t have to wait for the liquidity event. Express deals are ideal for such a case. To be always able to resell previously acquired shares, you need to buy at least 2% of the total allocation size of the offering. Data on the 2% size of the threshold is always in the offering’s description. Just pay attention to it with every purchase you make.
Direct purchase is an agreement between an investor and a seller of shares. In this situation, the investor enters the company’s Cap Table directly, not through the SPV Fund created by EquityZen.
Here’s a lifehack. It’s impossible to get any information about the sellers of shares and their motives. EquityZen strictly protects their privacy. The only way is a Direct purchase, which provides direct communication between the investor and the seller or their representative when you can ask any questions and communicate more openly. Direct purchases are available when purchasing shares amounting to $200–300k.
EquityZen Funds
EquityZen offers portfolio deals when investors purchase shares of several companies within a single investment. EquityZen is forming the portfolios as its Series LLC — Multi Company Funds. They are controlled by the managing partner with carry and APR.
Multi Company EquityZen Managed Funds are created as Thematic Funds or Growth Opportunity Funds. EquityZen Thematic Funds are launched several times a year and are aimed at investing in 4–6 companies from a specific niche (AI and ML, Fintech, Future of Health, Food, Gaming, etc.). Growth Opportunity Funds are launched annually and are aimed at investing in 15–25 companies that EquityZen experts consider promising.
Here’s a lifehack. If you don’t like deal-by-deal investments or don’t know how to make deal analytics very well, or don’t want to make it, investing in a ready-made portfolio formed by EquityZen specialists will suit you. It is essential to remember about carry, which is 10% + 1–2% per annum for Growth Opportunity Funds and 15% + 0.75–1.75% per annum for Thematic Funds.
Please feel free to share your hacks and maybe the downside of EquityZen in the comments below! Your investor experience, EquityZen reviews, and personal opinion about the platform are also welcome.
Enjoy the First Private Discord Community for EquityZen Users — search for “EquityZen Users Community” :)
