For over 80 years, since the 1930s, only accredited investors – the top ~7% of rich American – were legally allowed to invest in private companies. In 2012, as part of the Jobs Act a new era was brought on that allowed “unaccredited” investors – i.e. 93% of Americans – to legally invest as little as $100 in startups and other private companies.

This form of investing was always the ultra-rich’s secret weapon for growing extreme wealth – investing in the public stock market is the path to moderate wealth if done right, but building extreme wealth often comes through investing in companies at an earlier stage than those that are publicly traded.

Whereas investing in the stock market is investing in “publicly held” companies, investing in companies through a crowdfunding round is investing in “privately held” companies. This just means that a few individual people or entities own the voting shares of the company, verses the greater public owning the majority of the shares in a public company. Publicly held companies have stricter financial reporting requirements – i.e. quarterly, stock market-based companies have to put out a report to the public on how their company is doing. For privately held companies, this is not required, as they are allowed to keep their financials… You guessed it… private.

When investing in public markets, in most cases you have the daily option for liquidity of your investment – i.e. every day you can buy and sell your shares in the companies you invest in on the public market. In the private market, your investment is not liquid any day that you chose. Your return on a private company investment is often realized three to seven years down the line when the company has a ‘liquidation event’, which means when they go public or they get purchased. What you get in return for the lack of liquidity is the opportunity for a far greater overall return on your investment. When investing in the public market you hope to double your money between 10-20 years from putting it in i.e 2x. When investing in private companies you hope for 10x+, or more, on your money within three to seven+ years.

Like anything in life, with higher upside potential, you also have a higher downside risk – i.e. that investment could also equal $0 in three to seven years. Just like we are seeing in the stock market, no investment is ever a guaranteed win. You should only invest as much as you have the ability to comfortably lose.

This is crowdfunding but not “Rewards Crowdfunding” like Kick Starter or Indie GoGo where you get a mug, a t-shirt or the product for an inflated price. Rather, this is Equity Crowdfunding, now known as a “Community Round”, where investors get the opportunity to actually own a piece of the company they love, and to ride that [hopefully] successful rocket to stardom together. In Community Rounds, alongside the offering of equity in the business, the issuing company can also offer product “perks”, like in Rewards Crowdfunding, in order to sweeten the deal.

Many of the same things that we should be looking for when we invest in public companies on the stock market, are what we should be looking for when investing in private companies as well. Notably, the financials and the market potential. Both of these are nearly impossible to judge as a novice investor… yet we invest in public companies with all our life savings, every single day, completely blind. Thankfully, investing in early-stage private companies affords you the opportunity to judge two even more important factors with the knowledge that we all possess, regardless of our business background:

Team – What is the team’s prior background? How do they present themselves, the company, and their value proposition in their campaign? How organized do the founders, page, and campaign feel in the video and in the deck?

Traction – Does it seem like they have accomplished a meaningful amount of work – more specifically, with the money that they have raised prior to this round? Do their milestones seem achievable for the size of the team they expect to have?

Execution means much more than ideas themselves. Team and traction will paint you a solid picture to base your decision.