Twitter IPO and diversifying your portfolio

Good to GrrrrreatYay for the upcoming Twitter IPO and congrats to Buster for being a part of that story!

The stock market is the world’s most profitable money-making engine, and investing in it (as part of a diversified portfolio) is almost a prerequisite for the lazy early-retiree. But if you’re looking for riskier investments or unique ways to diversify, investing directly in early-stage companies seems lucrative.

And whenever a company goes public, or a major acquisition makes headlines, the idea becomes even more salient. For instance, Baylor3217 asks:

I’ve been a pretty avid [twitter] user the last 4 years or so. Had I wanted to invest $100,000 – $200,000 3-4 years ago, could I have done that as a nobody and what could it have entitled me to in the upcoming IPO?

At the $100k level, you’d be considered an angel investor in the tech world, meaning you are investing a relatively small amount of cash into a very-early-stage company. You’d be given equity and expected to advise the company, make connections to potential clients and Venture Capitalists, etc. To put this in perspective, by the end of 2009, Twitter had already raised over $100MM in venture capital, so a $100k investment would have been laughed at, to be honest.

VC rounds usually start at around $1MM. Like with angel investment, VC is not just a money/equity swap. Venture Capitalists sit on the boards of the companies they invest in, so they are expected/required to have decades of relevant business/entrepreneurship experience. Even more importantly, VC is about connections, as startup founders don’t only look at deal terms when comparing VC deals. Since money is the fuel that will propel their company out of “startup mode”, they want the highest octane fuel they can get, meaning a sharp VC who will give good advice, connect them to potential clients, and eventually help them through a liquidity event (acquisition, IPO). It’s called “smart money.”

The answer to “what could it have entitled me” would have been totally up to the terms of the investment deal you made with Twitter. These are some VERY complex arrangements, involving esoteric clauses like liquidation preference and “capped participation”. Google those terms and if you’re not falling asleep reading their definitions, you might make a good angel investor.

Lastly, it’s easy to look at Twitter’s IPO and say, “I should have invested 4 years ago.” What you should really ask yourself is “Do I know what will be making headlines in the business papers 4 years from now, and do I have access to these people?”

If all the above doesn’t deter you from angel investing, you still have that $100-200k, and you wouldn’t mind never seeing it again, you may have what it takes to become an angel investor.

[This content was originally published on the Mr Money Mustache forum]

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