Investing in start-ups as an expat

The article lays out some key fundamentals when investing in unlisted companies and looks at the various options available as well as the key benefits and risks

Speak to a trusted IFA
  • Author Experts for Expats
  • Country United Kingdom
  • Nationality British, Everyone
  • Reviewed date

Start-ups offer investors opportunities to earn potentially huge return-on-investments for what might often be a smaller initial investment than investing in stocks and shares for established well performing business.

Identifying and investing in early-stage start-ups offers investors significant profits as an early investor due to rapid growth into being a highly profitable business.

Companies like Facebook, Amazon and Google who are all still technically in their infancy in traditional business terms are the shining beacons as early investors made significant gains. There are hundreds of thousands of much smaller examples who have grown and since listed on stock exchanges earning their early investors millions from their comparatively small initial outlay.

However, as with any potential high reward investment opportunity, any investor must understand that the failure rate for new businesses is incredibly high with an estimated 60% of all new start-ups failing within the first 3-5 years. This means that any initial investment could be lost and therefore should not comprise an entire investment strategy and should be balanced in accordance with the risk profile of an investor.

With the current economic environment being as challenging as it’s ever been, the rate of failure of a new business is harder than ever to predict, so extensive due diligence is vital before any investment.

Three primary options for investing in a start-up

Traditionally, investing in start ups was limited to more sophisticated investors who would invest via an initial public offering or purchasing bonds, but with the advent of equity crowdfunding, people are using start-up investments as an alternative investment option.

Reasons that a company may decide to encourage public investment might be

Initial public offering (IPO)

An IPO is where a business provides the opportunity to the public to buy shares for the first time at a set price, with the promise of a share of the profits in the future. It will often be referred to as “going public” because it is the point at which the company goes from private ownership to public.

Going public isn’t necessarily for start-ups alone and some companies can be going for years or even decades before going public through an IPO and those which have been established longer may be able to provide more stable and secure investments, although the price is likely to be higher than riskier IPOs.

Before the IPO itself, a share price will be set and you must do your homework before you commit. While there have been multiple examples of companies that have seen their share price rocket after their IPO, there are far more examples of companies who were overvalued and saw their share price plummet and subsequently go out of business within two years.

Equity crowdfunding

Equity crowdfunding has shot up in popularity following the launch of multiple crowdfunding platforms that enable investors looking to invest smaller sums of money into companies and projects to help them get off the ground.

While an equity crowdfunding campaign can occur at any stage of a company’s life, they are most common in the early stages and are often use to raise funds to grow the business, projects or clear debts.

In exchange for the investment, a proportionate amount of business ownership will be offered.

Equity crowdfunding can be fraught with risk, with businesses being at an increased risk of failure, potential fraudulent campaigns, while others simply take years to materialise – if they ever do.

Equity crowdfunding therefore depends on the investor understanding the business that they are investing in and are able to buy into the concept rather than relying on the promotional material designed to sell the equity.

You can also seek advice on different opportunities from investment managers who would be able to look in more details at the product offering, market situation and financial plans to provide you with clear advice as to whether the opportunity is worth the investment.

Venture capital (VC) funding/Family Office/High Net Worth or Ultra High Net Worth

Traditionally, seeking investment via venture capital is a way for a business to raise funds in exchange for a stake in a fledging enterprise. These types of investors would typically seek to invest larger sums into a business which they view as having long term growth potential and may also seek to have a more active presence in how the business could be run.

Venture capital funding enables businesses to raise funds who cannot trade equity through stock markets and may be limited in other capital raising activities. For businesses seeking a venture capitalist, the downside can often be that the venture capitalist seeks a larger share of a fledging business.

There are typically three stages of venture capital funding:

As with any investment into a business, the earlier the investment takes place in a business’ life, the riskier the investment will be.

Venture capitalists will typically either have significant experience in evaluating opportunities through previous funding or potentially through MBAs. All venture capitalists will perform significant due diligence on the business, the market and the existing team before investing and will have explicit objectives for exiting – often within four to six years.

UK tax benefits for UK residents of investing in start-ups

HMRC have created several venture capital schemes that offer tax relief opportunities for Uk resident investors who invest in business that are not listed on a recognised stock exchange. These schemes are called:

To qualify for tax relief under any of these schemes both you, as the investor, and the enterprise you are investing in will need to meet the conditions set, including being a tax resident of the UK.

Under the schemes, and depending on which apply, you may be able to get tax relief on you income tax and also any capital gains tax you may otherwise have to pay.

Claiming the tax relief can get complicated, so you should seek formal advice regarding which schemes you may meet the criteria for before you make any investment.

Tax matters for non-UK residents

While the UK has specific schemes designed to provide tax relief for investors who are UK tax resident, other jurisdictions will have different rules as to how the investment and income from the investment will be taxed.

While a financial advisor would be able to provide guidance around some elements of the tax considerations, you should always seek tax advice for both the UK and your country of residence before making any investment decision.

We can provide you with a free introduction to tax specialists in multiple jurisdictions, including the UK, US and Australia if you would like to seek tax help regarding investing in start-ups.

How to choose which start-up(s) to invest in

When choosing on a suitable start-up to invest in, there are a number of factors it is recommended to take into consideration. It is also essential that you seek independent assistance if you do not have experience as there may be risks/benefits to consider before doing so. Also, alternative investment opportunities may exist which you may not be aware of that may prove to be more suitable investment opportunities for your personal financial strategy.

Key factors that you must consider when evaluating a start-up include:

As mentioned, it is always useful and often essential to seek help from an independent advisor who can help you evaluate each opportunity or present alternatives that might align with your requirements.

Key benefits of investing in start-ups

Major issues and risks with start-up investments

Options for people with larger sums to invest

The article lays out some key fundamentals when investing in unlisted companies.  The options of how to invest become greater depending on the amount you would be looking to invest.

This could be in the form of loans which can, at a later date, be converted to shares, providing an element of protection in the short term.

All types of investors from small investors to High Net Worth individuals (HNW) or Family Offices are looking at ways to invest outside of the traditional routes and investing in start-ups is one of the more lucrative opportunities available, if handled correctly as part of a wider investment strategy.

Speak to a trusted IFA

Reducing the stress and complexity of living abroad

City view