Howdy folks!
It’s nerdy in here today! We’re talking how to invest in private companies.
A quick note before I dive in: if you’ve been thinking about HoldCo Conference 2025, we’re down to our last 13 early bird tickets!
Prices go up at the end of September, so get your early bird discount today!
Investing in private companies is risky. But it’s also more exciting than dumping your cash in a market index and waiting. You’re more hands-on with your financial future.
But here’s the catch: you have to do it right.
Because there are lots of different ways to structure the deal. The right structure can make big money. But use the wrong one, and you might lose everything.
Here are all the structures I’ve seen.
By the way: This isn’t a comprehensive list. But there are plenty of options here to get you started down the right track. And of course: none of this is financial advice!
Structure 1: Simple Agreement for Future Equity (SAFE)
SAFE is a common structure for VC-style hypergrowth companies. It came out of YCombinator in California as a way to deal with companies planning to explode and then sell at a huge multiple.
It’s a pretty simple contract: your cash gets converted into equity, at either a fixed or maximum price, when the company does future rounds of funding.
Basically, invest now, get shares later — usually at a discounted rate or with other benefits.
It’s popular for startups because:
- you don’t have to figure out a valuation upfront (just a valuation cap)
- you can close individual investments without coordinating a whole round
- The paperwork is pretty simple (no expiration or maturity dates)
You get paid when the company sells.
If you want to dive into the details, YCombinator has a pretty reader-friendly guide on their site.
Structure 2: Convertible Debt
This is another one popular with VC-style hypergrowth companies.
It’s similar to a SAFE, in that your money turns into equity, at a discount, with future funding rounds. But it’s a little more investor-friendly because it’s debt — so you’re first paid at liquidation, and you get compounding interest (though rates are usually low).
It and SAFEs are not tax-advantaged via 1202/QSBS.
(More on those here.)
Structure 3: Common Equity Purchase
This one’s the easiest to wrap your head around: you pay $x for y% of the company.
Your shares are in the same class as all the rest.
The problem: you, as an investor, have no protections.
If you’re not the majority owner, you can get really screwed — bad management, dilution, you might have no voting power, and you’ll probably be last in line to get paid.
Structure 4: Preferred Equity Without Yield
This is the “good” version of a straightforward equity purchase. You’re still buying y% of the company for $x, but you get paid before common shareholders and you have better protections.
These protections might look like extra voting rights, board representation, or veto power over certain actions.
You’ll also see anti-dilution protection, where your ownership or share price is adjusted if the company issues shares at a lower price (in a down round).
This one is commonly used in deals where people expect the company to grow and likely raise again.
Structure 5: Preferred Equity With Yield
On top of all the above, you also get an annual cash pay yield on your money.
This version is used mostly for businesses with predictable cash flow, which aren’t expected to raise funds again.
Structure 6: HoldCo / OpCo
This is a lower-risk version of “Preferred Equity With Yield”.
Everyone gets common equity in the Operating Company (OpCo).
But you as an investor own the HoldCo, which lends money to the OpCo. The OpCo pays interest to the HoldCo.
That means you’re injecting capital into a company through debt instead of equity, which protects you if you’re dealing with a distressed company or turnaround situation.
As debt, you’re also first in line to get paid if things go south, and the HoldCo’s assets are protected from claims or lawsuits against the OpCo.
It’s a complicated one - consult your advisors!
Structure 7: Preferred Equity With Preference
You’d think “preferred with preference” is redundant. Surprise!
In this case, “with preference” means you get extra downside protection. You get your money back first, and sometimes you get a multiple of your investment.
And reducing the downside lets investors push valuations higher.
But this one’s all about the details. There are a ton of potential terms, on preference, participating, yield, covenants, seniority, etc.
I prefer simple over complex. Engage an experienced deal attorney if you’re going anywhere near this one!
Structure 8: Royalty
You pay $x for a percentage of top-line revenue for a period of time.
The Sharks on Shark Tank love it, but I don’t see it much in the real world.
My guess is that it's mostly used in consumer packaged goods like food, toiletries, other household items (not my thing). You need a consistent revenue stream to get a predictable return, or else you’re taking a gamble.
And you’d want to insist on top-line revenue — anything else can be manipulated by operators way too easily.
Structure 9: Shared Earnings Agreement
This one’s used most often in low-growth tech companies. It’s like a royalty scheme but using profits.
SEAs give investors some protections and a percentage of earnings above a certain threshold, instead of waiting for dividends to get paid out. Founders get capital, but also a flexible path and retain control.
This one’s a limited-time structure. If you put money into a SEA, you don’t expect a payout right away, because you’re expecting the company to grow.
In some versions of this agreement, your earnings cap out at a multiple of your original investment, after which you get equity options.
Structure 10: Cash Flow / Profit Share
In this one, you as an investor put up all the cash for a business. Then you take, say, 80% of profits until you get your money back. Then you switch to, say, 50-50 ownership with the operator.
You’ll find this sort of structure in restaurants and other SMBs with limited lifespan and high risk.
It’s often done through an LLC for additional protections.
Structure 11: Debt
This one’s easy. You loan money to the company and get a "return" by being paid interest.
It can be secured or unsecured (meaning no assets pledged). You might require a personal guarantee as well.
The problem, and why it’s rarely used: you have no upside if the company is a success.
Structure 12: Debt With Warrants
Like the debt option above, your loan comes with a twist: you get warrants to buy shares at a fixed price at some point in the future.
This adds the upside back into the equation for the investor.
But a reminder: most states have usury laws you shouldn’t violate.
Consult your lawyer!
Structure 13: Structured Preferred Equity (SPE)
Sometimes an investment is so distressed or declining that it’s too risky to do a normal debt deal without being usurious.
Time for SPE.
It’s basically Preferred Equity (see above), but sets a minimum rate of return for the investor before common equity folders get anything.
You might also have warrants built in.
Structure 14: Frankenstein
There are tons of structures that don’t fall neatly into one of the above categories. You can pick and choose pieces of all of them.
For example, a cash flow investment could include a preferred return or add debt to it.
Everything’s an option.
But don’t get carried away. In my experience, simple is what gets deals done.
—
There you go! 14 ways to invest in private companies. And I’m sure there are tons more out there.
In the end, picking the right structure is important to align incentives and maximize your chance at the best outcome.
The *best* way to get there is to have a team of tax and legal advisors who do it all day long and are experts.
If you’ve got a preferred structure I didn’t talk about, I’d love to hear it! Hit reply and let me know.
Have a great week.
Michael
