Fasttrack: What is the difference between buying shares in a privately held company vs public traded company?

Learn what it means to provide venture capital to a privately held business.

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Transcript of this episode

So today’s topic is what is the difference between buying shares in a private and, um, compared to a publicly traded company? People always ask me if I invest in a start up or if I invest in existing company or I want to go and buy a brand. For instance, stocks from America for instance, Nikola or Tesla. It doesn’t matter whatever kind of stocks you want to buy. There are big differences. So then these companies who are either traded on the public stock exchanges like these brands, and then they own the start ups.

And that’s where the companies are maybe have existed for 10, 50, 100 of years and that are not on the stock exchange. Well, you actually have to buy a share that is not traded publicly. So the difference is the first big difference is. Shares in a private company means you can’t go to the stock exchange and just sell it. When they used to use a trading system, when you go to a bank and say it’s uncertainty’s 50 stocks from one company, that doesn’t work.

So you have to find somebody else who is willing to buy that share in that company you’ve got. So let’s say you’ve got, uh, you’ve bought yourself a five percent share in come a start-up where you might have given them, let’s say, five hundred thousand, 1 million or Two million. Five million dollars spent. Whatever. Then you have to think, OK, how do I get it? Get rid of it. You have to find somebody who believes in what the business is doing and is willing to give you.

A certain amount of money that you’re asking for, because it might be that when you bought it, you you spent, let’s say, five million and the company is now worth. Based on your thing, we investment, would people ask now? 20 million. So you have to find someone who’s willing to pay more or less. 20 million. Maybe you pay 25 million. Maybe they pay 18 million. OK. It’s it’s your deal how you negotiate the price and then.

But how is it with stocks? So let’s say you have invested in a startup? The startup has gone public. As an example, for instance, let’s take companies like Netscape, Netscape is a business that went public over 20 years ago. Great products that they had on time. And so people who had stocks. Then went and sold them on a certain level. And, of course, if they started at a certain price, let’s say seven dollars and eventually went up to one hundred or two hundred dollars and you sold you got, of course, a good, uh, amount of money for your stocks.

But look at it today. So today you have, of course, uh, different kind of things affecting you as well. You have a capital gains tax in certain countries. You have to pay certain fees. Maybe there are certain amounts that you are not allowed to say without announcing or whatever. Depends on your position as well. Compliance rules and all these different other things that might affect your ability to sell. And that’s then where you have to really think, what can you do and how can you turn that business or that investment to your advantage?

And that’s so important when you compare, OK, what can I do between comparing a private company and a publicly traded company? And yes, a private company might eventually go on the stock exchange and be, um, put on the public exchange so that you actually then, son, your shares become sellable on the stock market and people might willing to buy when you offer them when the stock market, as you would do with other shares. But it doesn’t automatically mean just because you buy equity in that company that it is going to be going public.

It could even be done by the time that company is going to be out of business. Mr. Changes, if you’re investing in technology. Yes, industry changes, technology changes, and might something happen that suddenly that whole business is no longer viable or there’s some fraud happening in the whole business, just collapse? The same thing can happen as well, it was a train company. Just look at Enron. What happened with that company? Huge company. And even busted other companies at the same time.

And yet that all can affect massively other kinds of businesses as they go and move along the lifecycle that they are experiencing. And that then gives us the problem. Now we have to be aware of what’s going to happen in business, in the markets. Be aware what’s happening in that company and around it. What are the competitors doing? Companies going out of business. Other companies becoming strong. I mean, is this company losing shares, market share?

Is it growing market share? What is happening? What’s the developments? The growing, improving, but not a product sold yet. Are they getting contract signed in all these different things? And that is what has an impact on your ability to sell your. Share in that business to somebody else, because, of course, the better the business is performing, the higher the estimates will be as well towards what the long term value is of that company.

And somebody isn’t willing to pay more for it. Well, if the perception is negative, then you will have problems selling it or selling it at the price that you want to have it. And that’s where you have to see what you can do in and when you buy and invest. So thinking ahead of time when you invest in something, how can I have the exit? Because if you don’t have an exit strategy, you have a problem, because if you do have to exit, let’s say you own the board and suddenly you get in a dispute to postpone one of the other people and you just can’t stand it anymore.

You have to somehow exit because otherwise it’s it’s not good for you. Not good for that one. No, just, uh, just tough on that. No point. So you have to see how you can exit. And that’s why the same we’re thinking, OK, how can I contribute more to the company with my my expertise, my network. And that it’s not just about your money and your investing, but it’s where how you can as well contribute to that business and that business can grow.

And that’s why you have to think about it when you invest this way, because otherwise you’re just a passive investor. It’s like you buying shares on the market and you have no sort of ability actually to influence or contribute actively. And that’s no impact. And usually an investor, somebody who’s not just somebody who’s just. Saving some money and buying some fossil and that kind of stuff. But action invest as somebody who’s putting money in a business and they want to impact.

And they want to contribute as well and influence the business. And it grows and becomes a successful business by their ability. Because they have a network, they have maybe assets, they have experience. Have any kind of knowledge that they contribute or maybe they have their own business that can help them as well. Open doors. They have all sorts of other things that might be beneficial for this company where they’re putting the money in. And that’s where you have to have your mind set on it.

Do I want to invest in that? Do I understand really what the business is about? And I’m aware of where I want to move in the future. And it’s one of the same thing. OK, if I’m investing in some private business, what am I getting myself into? And think about that if you’re investing that. It’s good. But you often understand what the circumstances, the risks. And it’s what a massively difference between buying stocks or buying a safe equity in a privately held company.

And doesn’t matter if that company is a startup, whether it’s a it’s a law firm, it’s a manufacturer, it’s a window cleaning business. It doesn’t matter whatever it is. You have to understand what the business is doing and understand this point of this adaa towards that. And if you. You do your checklist and go through it. You are more likely to more benefit from the whole investment and enjoy it much more. And even if something doesn’t go the way you wanted, for whatever reason, you are able to evaluate in a clean and positive manner and decide whether you stick with it, invest more or you go out.


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