By J.P. Dahdah, Founder & CEO of Vantage
Investing directly in private companies can take two forms: debt or equity. These two terms are commonly used business terms, but what is the difference?
As a potential investor of your Self-Directed IRA in a private company, these two forms have different implications and can be viewed using four metrics, namely returns, risk, control and duration.
From the perspective of returns, debt provides a more stable stream of income. This is because when interest rates are fixed or even when variable they are based on some determinable factors and the investor can expect a certain level of income at certain periods. However, returns primarily depend on the level of growth of the company. Thus, an equity investor shares in the profits and losses of a company.
Now if we look at risks, they can be inferred from the type of the revenue generation. Risks are clearly higher in equity deals due to their more aggressive nature. But, keep in mind that debt carries with it a possible risk of default and the ultimate inability of the company to meet its debt repayment.
In terms of control, Self-Directed IRA equity holders often have voting rights, which enable them to participate in major company decisions that may affect their rights as owners. With debt, there is no such participation, but investors, also known as creditors, can have bargaining power by imposing certain conditions through affirmative and negative covenants with the debtor.
As to the duration, debt often contemplates a fixed or determinable period, depending on your agreement. As to equity, it will depend on how long you want to stay invested in the company. However, the longer you wait for your investment to grow, the higher the risk, but also the higher the potential for returns.
With the pros and cons of investing your Self-Directed IRA in either debt or equity, you can fairly consider which investment to make, according to your own preferences.
For more information on how you can discover your IRA investing alternatives, contact our team at (866) 459-4590 or ClientService@VantageIRAs.com.