Q&A: Think Long Term With Pre-IPO Investments; Living on Bitcoin

Editor’s Note: Welcome to the Early Investing Mailbag. Each week, we answer questions we think will help you learn about investing in pre-IPO startups and cryptocurrencies. If you have any questions for us, please email us at mailbag@earlyinvesting.com. Just remember, we can only answer your general questions for information and strategy. We can’t offer personal advice.

Q: I registered on a startup portal to invest in a company you recommended, but the following message came up: “Purchased securities are not tradeable.” What does this mean?

A: What it means, put most simply, is that there’s no practical way to trade (i.e., sell) your shares. When investing in a startup, you’re making an open-ended commitment to hold these shares. It sort of reminds me of my marriage vows… “to have and to hold, from this day forward, for better, for worse, for richer, for poorer, in sickness and in health, until death do us part.”

Well, you can skip that last part. I’ve been married for 36 years. I don’t plan on holding any of my startup shares that long! But as long as 10 years is a possibility. So is as few as two years.

Why two to 10 years? First, remember that you’re investing in private shares. You can’t find them on any exchange. You don’t have millions of people buying and selling them on a daily basis. “Private” means they’re not publicly listed.

In order to cash out your investment, you usually need a “liquidity” event. Liquidity events come in two flavors. The first is buyouts. When a company is bought out, you’re usually able to cash out. That can happen sooner as opposed to later.

The second liquidity event is when a company decides to list itself on a public exchange (through an initial public offering). When a company holds its IPO, you can cash out or you can decide to hold on to your shares… or a bit of both (which is what I usually do). An IPO usually takes a few more years than a buyout to happen.

But all that is changing. A couple of portals (Netcapital and StartEngine) allow their investors to buy and sell the private shares of companies that have conducted successful raises on their sites. (The portals are in a unique position to confirm ownership of shares, since the purchases happen on their sites.)

Being able to sell shares during a “for worse” period allows investors to move out of losing positions. The flexibility is nice…

But be careful! Some of those companies will turn things around and become great investments at the end of the day. It’s almost inevitable that startups will encounter a bumpy stretch or two on their journey.

I, for one, don’t mind committing to a startup long term… for better and for worse.

Please proceed with caution and don’t abuse your freedom to sell (on those sites that allow this activity).

To trade or not to trade? Early investors never had to answer that question before. It was answered for them. But as Bob Dylan used to say, “The Times, They Are a-Changin’.”

+ Early Investing Co-Founder Andy Gordon

Q: I’ve been hearing about people living off of just bitcoin (BTC). Is this possible? Should I try to spend bitcoin to support the ecosystem?

A: Over the years, many people have tried to survive by only spending bitcoin. Simply go to YouTube and search for “living off bitcoin.” You’ll see a huge selection of videos. The people who have tried it have had mixed results. Some have lasted long periods using only bitcoin and no fiat cash whatsoever. There are enough online and brick-and-mortar stores that accept bitcoin to make it work in major metropolitan areas. But it’s not exactly easy.

We’re not at the point where you can spend crypto easily. But we don’t need to be. Bitcoin is still in the early adopter phase. It doesn’t need to be a means of everyday payment (yet). For now, it’s working very well as a speculative store of value (like digital gold).

As fiat money systems continue to weaken around the world (and eventually go belly-up), cryptocurrencies will become more attractive. And as the market grows, prices will stabilize and cryptocurrencies will become more useful for daily transactions.

It will take time for all of this to take place. So for now, I advise holding your bitcoin rather than spending it (most merchants who accept crypto will immediately sell it for fiat anyway).

I do, however, encourage people to settle personal debts with crypto. Next time you owe a friend $20, ask if they want payment in bitcoin instead. Who knows, you might convert them into a hodler…

+ Early Investing Co-Founder Adam Sharp