Pre-emption rights for the next crowdfunding round

Why Freetrade is giving only B shares in this round ? While I don’t mind about Voting round but pre-emption right is a big negative point. It seems to be that one hand you want to include new investors in your growth journey but on the other hand you are taking away their basic right to be part of growth journey. Investors are brand ambassadors who along with their money, also supporting you by using their service and recommending you to their friends and family. So when you are going to a big player in future and would be raising the future rounds , why you don’t want them to be part of those future rounds? I am sorry to be blunt but it doesn’t make any sense.

Issuing Class B shares doesn’t stop investors being part of our growth. We hope that you will take part in our future rounds too.

It will as once big VCs will come at later stage then I am afraid they will dictate the terms and there will no one to protect crowd investors. If you are willing to give us this assurance that you are happy for us to participate in future rounds then why not to include pre-emption right with B class share? This will legalise the rights of investors in this round :slight_smile:

I think there are major concerns surrounding this issue. Crowdfunders take the risk and the big VCs walk off with the founders with the profits. However if I do get shafted I still expect to make a good gain even if its 10 times less what it might have been. I’ve no experience in this before but others here have raised this issue continuously and because they’ve been beaten before…

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@Rollingskies. As you are already FreeTrade investor with round 3, I am sure that you have got A class share and already got pre-emption covered from those shares :slight_smile:. Whereas as a new investor in this round , my risk exposure is high hence I am raising my concerns with FreeTrade management to offer same terms as previous rounds especially when the valuation would be higher

No you had to invest like 25k to get class a I think

Aha. Sorry I didn’t know :frowning:

It was ÂŁ20,000 in R3 :slight_smile:

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@Vlad. Thanks for clarification.
While I understand the voting right attached to high investment amount (due to overhead in engaging small investors even when they are not in a position to provide expert direction ) but completely disagree with pre-emption right restriction with lower amount. Before my excitement for investing in this round could touch the sky , looks like bubbles are started to burst :frowning:

I believe as well that it is better to have pre-emption rights than voting rights and I cannot understand why a company offers that only to large investments. Possibly 1-5K for them is nothing but for the investor maybe its a lot. To be honest that is the main reason why I prefer Seedrs over Crowdcube because Seedrs automatically includes pre-emption in all investment agreements under their nominee.

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Would you expect to exercise pre-emption rights through all future rounds? My questions on that would be:

  • Won’t you have the opportunity to buy as many shares as you want first anyway? Is 50k not enough?
  • Do you have the tens of thousands required to maintain your share over several rounds?
  • Are you spreading risk so that this is just one of many investments for you? Would investing a significant amount over years like this be wise?
  • Would you be happy if all investors were restricted and a round capped just because many didn’t want to take up their rights (as happened with monzo recently)?

I think for crowdfunding it is far easier, fairer, and in the investors’ interests to simply offer investment first to previous investors prior to opening the round to all (with a cap per investor). You are not a VC, you don’t need these rights.

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Could someone explain (or link to a relevant article) the difference between the A and B shares?

Am I right in understanding that this raise will strictly provide investors with B shares?

Main differences are A shares get voting rights, and sometimes pre-emption rights, and sometimes rights to be paid first if a company goes into administration. In practice none of those are useful to small investors - votes are weighted by no of shares (so large investors win), pre-emption is effectively available anyway as the cap per person in this round for example is 50k, and if imposed would be really painful IMO as it requires allocating shares to people strictly by their previous holding, and in crowdfunding typically results in unused allocations for no real gain.

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@kenny
Sorry I won’t agree with your statement that I am not VC so I don’t need it. Is my money has got some low exchange rate rate or face value less than potential VC money? Why only VC will get higher previliage when they are going to join at later stage when business is much less risky ? Whereas we as a crowd investors are taking the risk and investing (jointly ) to meet business demand at early stage?
As a little experience investor, neither I want to put all of money into one business at an early stage into single round ( remember what happened with Emoov and a long list of wind up, down valuation of Tandem and Verv at later stage ) nor I would recommend this to any of my friends and family ( no matter how rosy pictures looks like down the line). Of course if business is ready to give Anti dilution right and preferential right then I am happy to put big money but as we already know that these kinds of rights are given only to VC so I would stick to Pre-emption right and investing into each of future rounds as business mature and risk reduce. For me it is neither a speculation investment nor a race rather a long term investment and journey.
Regarding pre emption right for Monzo example.you have given, FYI pre emption rights work in % basis so it is not correct that entire new funding can be taken by existing investors. It is up to business how much they want to split between new vs existing e.g. in case of Monzo they decided to give more to VCs rather than new investors.

In this case it is a bit academic: Freetrade isn’t offering A shares nor I think any pre-emption rights, so your choice is going to be whether you invest or not.

Most of the anti-dilution/pre-emption discussion in this forum about has been about cases where there is a down round, and yes it is easier for a new financing source to “force” difficult terms on businesses that aren’t growing fast or are about to run out of cash. But this is the small investor/early stage investing life though: little voting control, lots of uncertainty, and if you’re lucky some wins. One way to avoid the problems you describe is instead investing in public companies (ok, not Debenhams) and funds. Risk and reward everywhere you look. Good luck!

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@rod, I understand what are my choices here but this is a community forum and I am still hopeful that Freetrade management may be considering to give pre emption right as it is not a decision which can’t be changed. In fact I have seen some pitches on crowdcube where later on during middle of campaign, business decided to give everyone pre emption rights.

It’s good to question and get into the detail on investment decisions!

Presumably yes a VC would join at a less risky stage, however, the share price will be higher. I invested in the first round when there was just a business plan, taking on lots more risk than current investors but with the chance of a larger reward. There has been lots of dilution in each of the 4 rounds, but each time my investment has gone up and this is what will continue to happen if the business is a success, it’s now less risky than it has ever been :+1:

Freetrade’s a customer first, community focused and fully crowdfunded business. It makes a lot of sense for it to continue to allow it’s customers to participate in future rounds, regardless of what the terms say - and they even want to do this in future via their app, like Monzo. That being said it’s sensible for it to keep this as optional as in some rounds it might not make financial sense due to high admin costs as per Adam’s (CEO) response.

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Does anyone know the implications for participating in this round for those who were a-share holders? Do they keep the voting and pre-emeption rights? Thanks

All investors in this round will receive B Class shares which do not have voting & pre-emotion rights.

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@Rob14,
I am completely aligned with your investing style about investing into future round more when business risk is getting reduced :slight_smile:
However as I am a potential new investor in this round and I am not sure if I will be allowed to take part in future round or not, hence the concerns.
If Freetrade is confident to give the chance to participate in future round verbally then why not to legalise it by pre emption right ?
I don’t agree with the justification about higher cost to give this right to everyone . There are hundreds of other companies (startups) giving this right and it is easily manageable in same way Freetrade would have allowed if they are going to keep their verbal promises l.