Who Can Invest in a Startup?

Estimated read time: 4 minutes

The world of startups is flourishing. This is much in part due to the digital age we live in. Startups seem to emerge on the regular, all boasting about bright potential and opportunity, and while some startups will prove lucrative for investors, many others will not succeed. As such, investing in the right startup can offer substantial returns, but investors must be cautious.

For those interested in startups, there are several key points to make about who qualifies. These relate to industry regulations, individual accreditation, and emerging, non-traditional startup funding options. The good news? You don't have to be a venture capitalist or even accredited, as once was necessary in the past. The Jumpstart Our Business Startups (JOBS) Act has much to do with this.

Accredited Investors

The traditional way of investing in startups is by being an accredited investor. There are many types. One of the most common in the world of startups is an angel investor. These are accredited investors who directly invest in small businesses or startups. They are given their name because rather than focus on immediate return and profit from investment, angel investors are primarily concerned with helping startups get off the ground. That is why so many of them are family, friends of family, or part of an extended network startup owners have direct access to.

To gain the accreditation necessary to invest in startups you must meet a set of qualifications. In the United States, these are tied to the rules associated with the most recent update to the Dodd-Frank Act (2010). To be an accredited investor an individual must meet one of the two following requirements for three straight years:

Have a net worth of over $1 million. This can be reached individually or by way of combining your income with that of your spouse.
Have a yearly income in excess of $200,000 if you are looking to qualify individually OR have a yearly income in excess of $300,000 if you are looking to qualify with your spouse. This yearly income must have been achieved in the two previous years and be reasonably expected in the year of accreditation application.

To be accredited means you have established a clear budget for investing, and a large one at that. Once accredited, there are many ways to invest your money. Typical options include investing in venture capital funds, hedge funds, directly investing in a startup, and private equity firms.

Other Investors

There are times when accredited investors need to meet other qualifications to see their money invested in a startup. This often occurs when they invest their money in larger firms or funds that are primarily dedicated to investing in startups. While some may consider this excessive, it is both to protect the startup and your investment.

Two higher tiers of being an accredited investor are qualified clients and qualified purchasers.

Qualified clients are those who meet one of the following qualifications:

Individual has $1 million or more in assets under management with an advisor. Assets cannot include their primary household.
Individual with a net worth of at least $2.1 million. This can be achieved individually or with your spouse.

Qualified purchasers are those who meet one of the following qualifications:

Individual has at least $5 million in investments
Company has at least $5 million in investments that are owned by family members
Trust with at least $5 million in investments
Company with at least $25 million in investments
Investment manager managing at least $25 million

Individuals via Technology

Mentioned previously was the Jumpstart Our Business Startups (JOBS) Act. The act was signed in 2012 by President Barack Obama, but it did not take effect until 2014. It was established in hopes of providing non-traditional growth solutions to small businesses and startups. These non-traditional methods focus on allowing startups access to larger crowds of investors while allowing those investors to not be accredited. Investors benefit from access to startup potential while startups benefit from access to more capital.

The JOBS Act came about on the heels of crowdfunding. To provide startups access to more capital, the act established the principle of equity crowdfunding. This allows startups to seek funding on crowdfunding platforms without investors needing to be accredited. If you don't have the funds to become an accredited investor but still want to invest in a startup, a crowdfunding site is the option.

Make sure you do your research and act quick once you find a startup to invest in. Businesses cannot request more than $1 million in crowdfunding in any given year. The amount you can invest will also be affected by your tax income bracket.

Popular crowdfunding sites for startups and investing in startups include Kickstarter, GoFundMe, Indiegogo, and MicroVentures.

No matter where you stand in your financial life, there are plenty of opportunities to invest in startups. There are also plenty of reasons as to why you should! Because of the JOBS Act, investing in startups has never been more accessible.Now, just about anybody can invest in a startup and see their financial portfolio grow.