Seedrs has become the first crowdfunding platform to offer a convertible equity investment opportunity in a start-up business.
The convertible stake is being offered in Future Ad Labs, a digital advertising start-up. What’s significant about this is it’s the first time a crowdfunding platform has offered a stake in a business at the sort of preferential rate usually only available to venture capitalist investors.
Let’s take a more detailed look at how convertible equity works and the opportunity on offer with Future Ad Labs.
Find out more about the Future Ad Labs opportunity on Seedrs
What is convertible equity?
Convertible equity, as the name suggests, offers a stake in a business which, providing the business survives, is later converted into shares, or equity.
This type of funding is usually sought as a means of keeping a company going between rounds of investment from venture capitalists. More significantly, it delays the need to put a valuation on a company, which can be very tricky in its early days while it finds its feet, until the next major round of venture capital funding.
Because convertible equity investors are providing much-needed ‘bridging’ funds, in return their investment is later converted into shares at a discount to the price paid by everyone else at the next funding round.
In this case, the discount is 15%. If a business is subsequently successful, this discount can make a healthy difference to the eventual value of your investment, as you'll have more shares.
If the next funding round doesn’t take place within a set period, in this case 12 months, the convertible equity is converted into shares anyway, again at a discount.
Future Ad Labs
Future Ad Labs’ business is to “devise new and engaging formats of branded digital advertising to generate revenue for publishers”. Its main development is the PlayCaptcha, a game alternative to the extremely annoying but necessary reCaptcha system of entering random letters and numbers to prove you’re human.
[SPOTLIGHT]These games can be branded, giving advertisers a new way of potentially reaching audiences. It’s also developing new ideas for video advertising and content that is behind a subscription paywall.
It’s seeking £300,000 in investment from this convertible equity funding on Seedrs. At the time of writing it had already raised 80% of that target in just a couple of days, so there are clearly investors out there who believe the company has a strong proposition.
The company was founded as Digital Spin in 2012 and was initially funded to the tune of £60,000 via Seedrs. It then merged with Future Ad Labs and received $1 million (£584,860 at today's rates) of funding from venture capitalists.
It's already worked with brands such as Heinz, Nestle and Unilever and media brands including ITV Breakfast, OK! magazine and Autotrader.
You can invest in the offer from just £10.
Risks
Of course, if the business fails at some point in the future, you may lose some or all of your investment. And the eventual share price can fall below the value of your original investment.
It's also wise to spread your investment risk, so not too much of your money is invested in one place, just in case the worst should happen.
Tax treatment
This opportunity is eligible for tax relief as part of the Enterprise Investment Scheme (EIS), where you can claim 30% of the cost of the shares in the tax year you buy them.
However, you need to hold the shares for three years after the shares are issued. If you meet the above criteria, any gain from the sale of the shares will also be free from Capital Gains Tax.
Seedrs will help you with the tax relief paperwork.
Find out more about the Future Ad Labs opportunity on Seedrs
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Crowdfunding: how to invest in start-ups with as little as £10
The Year of the IPO: the new share winners and losers
Beginner's guide to investment platforms