Investments Only the Rich Can Make

What they are and how you can participate

It takes money to make money.

That’s the sad truth, but known reality. It’s no secret that the stock market is a great way to build wealth, generating annual returns of around 11%. Even with the high inflation numbers of today, stocks not only protect purchasing power but adds to it.

In recent decades, technology has provided easier access to the stock market for individuals. Now there are many informational resources and technological applications to help individuals build wealth.

But after getting a fix of stocks, and then possibly cryptocurrencies and real estate, where can investors turn to next? Well, it depends on how much money you have.

The two types of instruments that can offer great returns are convertible notes (and senior convertible notes) and buying pre-IPO shares.

Warning: Both these investments are complicated and not for beginner investors.

Convertible Notes

Investopedia defines convertible bonds as,

bonds issued by corporations that are convertible to company stock

Companies need to raise money to grow, for example, a car company may want to build a new multi-billion-dollar manufacturing plant. They usually do so in two ways. They can issue bonds (debt) or stock (equity).

To investors, bonds are less risky than stocks. That car company needs to pay its financial obligations in a certain order. Bondholders get their money back before stockholders, in the case of bankruptcy or other distress. As a result, bonds offer low returns than stocks.

Less risk = less return

Higher risk = higher return

And that is the beauty of convertible notes. They offer the low risk of bonds but possibly higher returns of stocks.

A convertible note is a debt security (aka bond) that gives the option to be converted to a predefined amount of stock.

Let’s say a company issues convertible notes at a 3% yield. That would be similar to buying a bond with a 3% yield. But the note also offers the option to convert into stock, at the price of the stock when the note is issued.

At the time of issuing, the company’s stock is $30. If in 6 months the stock goes up to $40, it would be advantageous to convert the note to stock, because that is a 25% gain. But if the company’s stock goes to $25, then it is advantageous to keep the note as is, because you are still getting a 3% yield instead of losing money as a stock.

Sound too good to be true? Well, it’s not easy to get a convertible note.

Most of the time convertible bonds are issued to seed (or angel) investors, not us average investors. Seed investors are individuals who are looking to invest in very early startups. They usually invest hundreds of thousands and spend weeks or months doing research on where to invest.

Pre-IPO Shares

I’m very excited to one day (hopefully) have the funds available to qualify for purchasing pre-IPO shares. It would open the door to many promising companies, not currently available to me.

There are probably several marketplaces to buy pre-IPO shares. The only one I am familiar with though is EquityZen.

How it works: Employees of young, not yet public companies will sometimes get paid in shares. These employees can then sell their shares on EquityZen to investors who want to invest in this company.

Since these companies are not yet public, investors can’t buy their shares publicly, as they would with other companies.

Imagine getting the chance to invest early in SpaceX, Barstool Sports, or Stripe.

Big-name companies such as those usually have a waiting list to buy pre-IPO shares, but EquuityZen still has plenty of other great companies.

Just like before, there’s a catch. To buy pre-IPO shares, one needs to be an accredited investor. The qualifications to be an accredited investor:

• Have a net worth over $1 million; or
• Have an annual income exceeding $200,000 for the last two years

Again, higher risk leads to higher reward. Investing in younger companies is riskier — it can lead to astronomical returns or losing everything. Or a happy medium of 15% annual returns.

Final Thoughts

While it is difficult to gain access to convertible notes or pre-IPO shares, there are still many ways to build wealth.

Investors today have many options of where to invest their money. And most of these options have an abundance of resources to help navigate them.

Convertible notes and pre-IPO shares are complicated instruments but their potential returns make them worth striving for.