No matter how eventful or promising a startup looks like, there’s always few risk factors involved when you invest in the venture. Hence, you must consider the following risks prior to any investments in equity securities: No matter how eventful or promising a startup looks like, there’s always few risk factors involved when you invest in the venture. Hence, you must consider the following risks prior to any investments in equity securities: 

 

Capital Loss: The future of a startup is often hazy as there’s no guarantee whether the new concept will blend in well with the targeted audience or not. Hence, you must be skeptical about the risk factor and should thoroughly consider the fact that there are chances that you may lose all the capital you invested without any returns or profits. Therefore, it is always advised to take your chances with the capital that wouldn’t disturb your standard of living even if you lose that money.

 

Shortage of Dividend:  Many investors jump into equity investments with the hope that if the startups make profit, then they can have sumptuous returns via dividends without the need of selling their shares in the company. However, the new startups are likely to pay any dividends at the initial phase of their venture. The only way, you can get the return on your investment once the startup is successful, is by selling your shares in the investee company. Most of the companies today wait for some good number of years before they start-out dividend payouts from the time you have invested in the company.

 

Unstable Economic Conditions:  The success of any investment doesn’t rely on the success probability of the startup alone, but it extends to certain economic factors such as equity markets, the availability of external credit markets, global economic stability, etc. Nobody can offer assurance or anticipate about the stability of economic conditions beforehand which is one of the key factors for your investment in a startup to be successful.

 

Performance:  Most of the investors opt for equity investments in a startup considering the past performance of the company. You must understand that the past performance of a startup can’t be a cue for the startup’s future results. The basic idea of startup revolves around a new concept and with the changing trends in the market, the future of the company varies as well. Hence, check the future perspective of the startup rather than focusing on the past performance while investing in the venture.

 

Startup Investment Evaluations:  All the evaluations of a startup are based on assumptions not real data. Hence, it is difficult to determine the risk factors involved related to the startup valuations. In short, nobody can anticipate the magnitude of the risks involved with a startup based on its evaluation. So, you must focus on the scalability of your investments based on the future prospects, determining the market trends as well as the potential of the startup in the next 5 years. 

 

Unable to Monitor Startups:  Investors are not provided each and every information required to verify the scalability of a startup in the long run. It becomes difficult to estimate the current value of the startup because of the uncertainties and inaccurate information about the venture. 

 

Absence of Liquidity:  There’s no guarantee of a return while investing in a startup. Due to the absence of liquidity mechanism, you are likely to see a return on investment sooner. Understanding the exit strategy of a startup beforehand will help you decide whether the startup investment will bear positive results and ROI any sooner. 

 

Tax Risks:  The tax assessment is quite complicated when it comes to startup investments. Hence, it is advisable to consult a professional tax auditor about the tax consequences while investing in a startup. 

 

Regulatory Risks:  Besides the above, there are often some regulatory risks involved regarding investments in startups depending on certain regulations and laws of the investor’s country of residence as well as the country where the startup is registered. Hence, it is recommended to consult a legal advisor before proceeding with the investment. 

 

The above risks are suggestive. It is in your best interest to seek guidance from an independent legal as well as tax advisor and read all the relevant investment documents thoroughly prior to any investment in a startup.

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