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Due to the potential for losses, the Financial Conduct Authority (FCA) considers these
investments to be high risk.
What are the key risks?
- You could lose all the money you invest
- If the business you invest in fails, you are likely to lose 100% of the money you invested.
Most start-up businesses fail.
- You are unlikely to be protected if something goes wrong
- The business offering this investment is not regulated by the FCA. Protection from the
Financial Services Compensation Scheme (FSCS) only considers claims against failed
regulated firms. Learn more about FSCS protection here.
- The Financial Ombudsman Service (FOS) will not be able to consider complaints
related to this firm
- You won’t get your money back quickly
- Even if the business you invest in is successful, it may take several years to get your
money back. You are unlikely to be able to sell your investment early.
- The most likely way to get your money back is if the business is bought by another
business or lists its shares on an exchange such as the London Stock Exchange. These
events are not common.
- If you are investing in a start-up business, you should not expect to get your money
back through dividends. Start-up businesses rarely pay these.
- Don’t put all your eggs in one basket
- Putting all your money into a single business or type of investment for example, is risky.
Spreading your money across different investments makes you less dependent on any
one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk
investments.
- The value of your investment can be reduced
- The percentage of the business that you own will decrease if the business issues more
shares. This could mean that the value of your investment reduces, depending on how
much the business grows. Most start-up businesses issue multiple rounds of shares.
- These new shares could have additional rights that your shares don’t have, such as the
right to receive a fixed dividend, which could further reduce your chances of getting a
return on your investment.
If you are interested in learning more about how to protect yourself, visit the FCA’s
website here.