Investing 101

Investors

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Why invest in startups or SMEs?

It shouldn’t just be to make money! This isn’t the stock market. Startups are much riskier. Everyone has their personal motivations for investing in startups but ours is to support founders and businesses that are able to scale and create good jobs; pursuing visions we care about and has a really good chance of yielding a return should their vision become a reality.

Is an equity investment appropriate for me?

If you can’t afford to lose every naira/dollar you invest on LoyaltyHub, the answer is no. If you can’t afford to wait 2+ years for a return, the answer is also no.

Unlike the stock market, investment outcomes are much more binary (complete failure or wild success) and there’s no stock market that’ll allow you to easily re-sell your investment stake to someone else, unless the company is acquired or prepares for an IPO.

Is a debt investment appropriate for me?

Compared to equity investments, loans can be slightly less risky but also have less of an upside. You should still assume that even a loan will not be paid back. Never invest more than you can afford to lose. Otherwise, LoyaltyHub is not appropriate for you.

Just how risky are Equity funding for startups and SMEs?

Very! You should not allocate more than a few percent of your investment portfolio to startup investing. You should never invest so much that it would impact your lifestyle or retirement plans if your entire investment is lost. Some investment listed on LoyaltyHub could be much riskier than a public company listed on the stock market.

How can I decrease the risk?

You are more likely to avoid loss by diversifying your investments (Equity, Revenue Share, Convertible Notes, Project Share and Crowd-selling), focusing on areas you have expertise in, and investing in startups you are a passionate user of. Even professional investors have a hard time predicting exactly how startups will earn money in the future (e.g., Google in 1999). Investing in what you know and find personally valuable is an important signal of a good investment.

How many investments should I make?

We recommend making a bunch of small investments each year, rather than one large one. For instance, if you decide you can safely invest 500,000 per year in startups, it’ll be less risky to make ten 50,000 investments instead of a single 500,000 one. You should never invest more than you can afford to lose.

Can I easily re-sell my investment?

It’s safest to assume you cannot resell your investment to another investor. First, there is not yet a liquid secondary market like the NSE for private companies. Second, almost every equity security on LoyaltyHub prohibits resell, as private companies carefully guard the number of shareholders on their “cap table”. Third, Regulation Crowdfunding specifically prohibits resale of securities for one year, except to the issuer, an accredited investor, a family member or their trust.

Will my percentage ownership be diluted?

Yes. An equity stake will almost certainly be diluted.

Successful startups host multiple series of financings, all the way to IPO. For each financing, the startup issues additional stock to the new investors. As long as the value of the company increases with each funding round, this is healthy and normal. For example, the first investor in Facebook, Peter Thiel, originally purchased ~10% of the company for $500,000. By 2011, that stake was diluted down to under 3%, but estimated to be worth ~$2 billion.

Sometimes, when things are not going well, the startup is given the option of going bankrupt or raising more money in a “down round”, which means the value of the company decreased since the last financing. This is very bad for the founders and past investors alike; the dilution happens much more rapidly. But it’s preferable to the startup going bankrupt and the investors losing everything.

Will my investment have voting rights?

It’s rare for an investment on LoyaltyHub to offer voting rights directly to smaller investors because founders fear it can scare off venture capitalists who invest in later rounds, due to the hassle of collecting thousands of signatures. You should assume your investment does not include voting rights unless specified otherwise. Your stake will almost certainly be diluted when companies raise follow-on funding.

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Which startups or SMEs should I fund?

LoyaltyHub is designed to be a platform connecting investors with startup and SME’s founders. LoyaltyHub does not recommend you invest in any particular business, even if a business appears to be more featured on Loyaltyhub.com.ng. In an effort to reduce fraud, we apply standards when deciding which startups or sme’s can fundraise on LoyaltyHub, but you should conduct your own due diligence to decide which business, if any, are right for you.

The information regarding companies on LoyaltyHub is provided by the companies themselves. LoyaltyHub may assist a company in presenting this information, but we don’t verify its accuracy or endorse the company. If you’re investing through a LoyaltyFund, be sure to also read the fund’s offering documents. If you have any questions, ask at info@loyaltyhub.com.ng!

How should I conduct due diligence?

You are responsible for conducting your own due diligence. Groups of prospective investors working together are more likely to discover issues with a startup: the “wisdom of the crowd” at work. When companies are fundraising, investors are highly encouraged to ask detailed questions. If the founder gives answers that are not convincing, then you shouldn’t invest!

How much am I allowed to invest?

It depends on which type of fundraising the start-up or business is doing.

For start-up and equity investing, LoyaltyHub calculates your annual investment limit based on the net worth and income provided upon account opening. Investment limits are for every 12 month period. Every investment in an Equity Crowdfunding offering counts towards the annual limit. We will not let you invest greater than this amount.

Can Nigerians in Diaspora and other countries citizens invest?

Yes.

How do I apply to invest in a company?

If a company is fundraising on LoyaltyHub, and you are eligible to invest, there will be a blue “Invest” button near the company profile picture. Indicate how much you’d like to invest, click invest and choose your payment method (we support bank accounts, credit cards, wire transfers, and checks), then sign the agreement.

Note that not every company listed on LoyaltyHub is doing an actual equity or revenue share fundraising. Some are just raising funds by crowd-selling their items or financing a specific short-term project with clear returns.

I applied to invest. When do I hear back?

You’ll usually hear back within a day, unless there’s special circumstances. No money will leave your bank account until your application has been accepted and both parties have signed the contract. The size of your investment may be reduced to a lower amount or may be rejected.

I’ve been “waitlisted”. What’s that?

Investors are often waitlisted when startups receive more money than they need (i.e., the round is oversubscribed). Instead of reducing the size of everyone’s investment, founders (or LoyaltyHub, in the case of a LoyaltyFund) may choose which investors to accept, and may prioritize those who can help their company the most. You can decrease your chances of being waitlisted by applying to invest early, connecting your social networks, and filling out your profile.

My application is accepted. Now what?

You have 7 days to ensure payment is sent to an escrow account. If this time expires, your investment application will be automatically canceled. Your funds will be held in an escrow account until the fundraising target has been met and the round closes. Your funds are then transferred to the startup and your investment is fully confirmed and executed.

How are contracts signed?

Everything is handled electronically. After signing contracts on LoyaltyHub, you’ll be emailed a PDF of the executed documents signed by both parties. A copy of your contract is also always available on LoyaltyHub.

Do my funds go in an escrow account?

Yes. Your investment is placed in an escrow account hosted at First Bank of Nigeria. For Equity and Revenue share Crowdfunding offerings, funds are transferred to the startup or SMEs only after the fundraising target has been met and the round is closed.

Crowd-selling of items and short-term project financing with a return may not have a fundraising limits but investors will always have 5 days to cancel an investment before it closes.

What happens when rounds are oversubscribed?

Sometimes, more money is committed than a startup or SMEs can accept. In this case, priority for who becomes an investor is generally placed in the order that the funds have been received in the escrow account. However, there are some exceptions. Sometimes startups or SMEs may prioritize those they feel can help their company the most, and allow those investors to “jump the line”. You can increase your chances of becoming an investor by filling out your profile and connecting your social networks.

How are investment securities delivered to me?

After an investment is successfully executed, you will recieve an e-mail with your electronic contract signed by both parties. All of your agreements will be hosted on LoyaltyHub with an access link.

How is LoyaltyHub compensated?

For Equity and Revenue share Crowdfunding, LoyaltyHub charges investors up to 2% of their investment. We also charge the company up to 6% of their total funding volume.

For crowdfunding of a project, we can charge up to 10%, while for crowd-selling of an item, we can charge upto 15% of funds raised depending on the item margins and category. Also note, that not all crowd-funding project are for profit. We may on our discretion help valid and well verified social organizations raise funds on the platform though sparingly and seasonal.

I changed my mind! Can I cancel my investment and get a refund?

Yes. You can change your mind at any time while a fundraising round is still open up to 48 hours before the offering deadline, even if you’ve signed the investment agreement. You’ll receive a full refund, for any reason.

Are there any limitations on canceling an investment?

No. While your funds are still in the escrow account, and if the fundraising round has not been closed, you can cancel your investment commitment anytime, for any reason.

Can the company or the LoyaltyHub Moderator cancel my investment?

It’s rare, but yes. Your investment may be canceled if your funds are still in escrow: startup founders have the same cancellation rights that you have. Legally, startups can cancel your investment for any reason, but a more typical example would be if they discovered you worked for a major competitor.

After the fundraising round is officially closed, and the startup has accepted the funds in the escrow account, your investment cannot be canceled.

When will the fundraising round close?

A fundraising round will close at their offering deadline. However, a round may close earlier after their funding target has been met. In this case, you will receive a 5 day notice before the close date via e-mail. (Also, every round is open at least 21 days).

What happens if the fundraising fails?

You’ll be notified via e-mail and receive a full refund of your investment, along with any administrative fees you’ve paid.

How long will it take to receive my refund?

It depends on the method by which you’ve paid. We’ll initiate a refund as fast as possible but it can take up to 7 days.

What updates should I expect after investing?

You should not expect too much communication with founders or SMEs owners. After all, you want them busy running their company, not talking to hundreds of investors all day. You’ll typically get one update every quarter. Also, some amount out of the funds-raised (a sum out of LoyaltyHub 2% equity investment in the SME or start-up) have been made available for suitable and assigned independent financial reporting company to help start-ups and SMEs with this part of updating investors.

How can I help the startups or SMEs I invest in?

Most of the fun from investing in startups comes from how you can help them! You can offer product feedback, introduce founders or business owners to relevant people in your network, or evangelize product launches. Founder