Any investment comes with risk – and identifying and managing that risk often marks the difference between a good and bad investment.
With that in mind, here are eight key points that investors should consider before parting with their hard-earned cash:
Balance risk and reward
The first rule is do not risk any money you cannot afford to lose. Although industry insiders reckon the average return for investing in a start-up is 2.2 times the cash invested, more new businesses fail than succeed and potential profits do not pay the bills.
Take a tax break
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) offer some generous tax breaks to offset income tax and capital gains tax – but those reliefs are compensation for the risk involved.
Spread the risk
An array of platforms and alternative investments allow you to make sensible investment decisions – from investment funds to crowdfunding. Follow the rule of not putting all your cash in one investment or asset class.
Listen to wealth warnings
Whether you invest direct or prefer going through investment funds on a platform, make sure the risk rating suits your financial plan. The Financial Conduct Authority (FCA) is limiting investment opportunities for ‘unsophisticated’ investors who could lose their cash – so take heed of any wealth warnings.
Take charge of fees
Read the small print and find out how much an investment will cost as fund managers will take a slice of your capital and profits. Fees can range from set-up charges, annual administration fees and early withdrawal penalties if you want out before the agreed time.
You will also lose SEIS and EIS tax breaks if you don’t tie up your money for the full three year term of the deal.
Be a control freak
If you are investing a substantial amount directly into a SEIS or other investment, look for board level representation so you can see how your money is spent and understand how the company is run.
Watch out for companies that issue more shares to invite more investors on board – this reduces the value of your stake and that of any likely return.
Make sure you have a handle on how the business works and who is running the ship. A little time and money spent up front can head off expensive problems at a later stage.