Small business investing can be a fantastic way to diversify your investment portfolio while investing in businesses that you care about, or visit frequently.
In this 3 part blog series, we're going to explore three different types of small business investments, the pro's, the con's, and how each can have an impact on you, depending on the business.
Making an equity investment in a business is defined as buying an ownership stake in the company.
The business is then free to use the invested cash for a variety of things, such as investing in inventory, marketing, or personnel. The injection of money should ideally be invested to grow the business, and provide you with a return.
It is important to note that investing in any private entity should be seen as a long term investment. Selling private shares in companies is difficult and time-consuming if they can even be sold at all.
Like all investments, equity investments into a small business carry significant risks. However, unlike debt investments, equity investments also carry the most upside.
Before investing in a small business, it is vital to know the goals of the owners or the management team. If a small business is looking to scale, and have an "exit" by way of an IPO or acquisition, then an equity investment is most likely appropriate.
Most commonly known as "angel investors," individuals who invest in small businesses that are looking to scale are knowingly making high-risk investments, with the possibility of an outsized return in 5-7 years most often.
Small business equity investing with the goal of an outsized return is not for the faint of heart and should be undertaken with full awareness of the risks involved. If you are one of the lucky few who manage to catch the next Amazon or Google early, the upside is almost the same as winning the lottery. While slightly less risky, it is essential to be aware of the fact that you might lose your entire investment.
The long term nature of small business investments aligns well with the long term nature of retirement accounts. Investing with a pool of money you may not need for 20 or 30 years means that you can invest for the long term.
The tax advantages of an IRA or 401(k) are also significant for small business, potentially high growth investments. One of the most notable examples of tax-savings with an IRA is when Max Levchin famously invested in Yelp with a ROTH IRA and subsequently made $95 million. The best part is, he won't pay taxes on any of the gains or withdrawals.
Making these kinds of investments has not always been easy. Historically, you would need to ask permission from your custodian, wait for them to fund the venture, pay their fees, etc. The process was lengthy, expensive, and complicated.
Using a Self-Directed IRA or Solo 401(k) to make a small business investment is simple. Upon identifying a suitable placement, you title the equity stake in the name of your IRA or Solo 401(k) and wire the funds from your Rocket Dollar account. No more waiting for a custodian, or paying their fees.
If you'd like to learn more about how making small business investments can be made easy with Rocket Dollar, please send our team an email to info@rocketdollar.com.
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