We are providing a platform for alternate asset classes which is catching up very fast with the evolving start-up ecosystem and digital economy. Investment in unlisted shares is generally suitable for those investors who are looking for investing their surplus funds to create their long-term wealth by investing in high growth companies. There could be matured companies which are likely to go for IPO in the near future, which post listing can give good appreciation in investment value, subject to market conditions prevailing at the time of exit. Further, there could be some start-up companies which have potential to become unicorn on account of the disrupting business model and growth prospect, though, on account of the evolving ecosystem, there could be disruptions which may impact the business of these unlisted start-up companies due to which these start-up companies may face chances of failure. Considering this, we consider the following to be risk factors while investing in unlisted stocks (though this is not exhaustive list).
Liquidity is one of the key challenges for shareholders of unlisted / Pre IPO shares.
Lock-in period of 6 months from the date of IPO launch. According to SEBI’s guidelines, the Unlisted shares can be sold in the market only after one year of IPO.
Dividends: Start-up and early-stage businesses very rarely pay dividends because the companies usually redeploy their profits in the growth of business to build the shareholder value over a period of time.
Dilution: If start-up’s go for additional funding at a later stage, more shareholders will come on board, reducing your percentage of holding in the company. Another reason for dilution in a business would be due to the grant of options available to employees of the investee company or to other service providers closely linked to the business. It is therefore important to continue to reinvest in the business, increasing your percentage of shareholding.
Down-round valuation: There may be down round valuation while doing fundraising if the performance of the start up companies gets adversely impacted for a particular year. This may impact the shareholding of the investor if he/she has not been protected through appropriate anti-dilution clauses in their agreement with the company in the event of a down round.
Higher tax rate considering the period of holding being more than 36 months from the date of investment for computing long term capital gain vs period of more than 12 months for listed companies for computing long term capital gain.