Crowdfund Investing For Dummies
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A common perk for owning stock in a company (via crowdfund investing or otherwise) is having the right to dividends. Dividends do not (usually) diminish the amount of stock that you own. Instead, they’re a reward based on the amount of equity you own; you’re given a certain percentage of the money in the dividend pool.

A startup or small business should pay you dividends only if it’s making a significant profit. In the early stages of a business, its success depends on its ability to reinvest as much money as possible. Therefore, you likely won’t see dividends in the first months or even the first years of a startup.

How dividends are paid varies widely; they could be issued monthly, quarterly, yearly, or not at all. For a small startup company, paying dividends can be very time consuming, so chances are, your dividends (if you get any) will be issued quarterly or — more likely — yearly.

As with all investments, there are major tax implications to money you receive from dividends. Be very careful not to spend every dime that you reap from your investments because you need a portion of it to cover your tax bill come April. Speak to an accounting professional, and don’t get caught with your pants down (and pockets inside out).

Be careful that you don’t fall into a trap that countless other people have fallen into: believing that your dividends are going to continue forever and most likely increase. When times are good, investors often believe that they’re going to get even better.

When someone makes an investment and starts getting dividends, she’s riding a high that she may believe will never end. She may go out and spend all that money thinking that she can afford to spend the early dividends on luxury items (or nights out on the town) and use the dividends later in the year to pay for taxes.

Then, in the fourth quarter of the year, the company takes a nosedive and has to stop paying dividends. When the tax man comes knocking on April 15, this investor is left with a huge bill that she can’t pay. Save for taxes first before spending your dividends on unnecessary items. Don’t make the same mistakes that others have made before you!

About This Article

This article is from the book:

About the book authors:

Sherwood Neiss, Jason W. Best, and Zak Cassady-Dorion are the founders of Startup Exemption (developers of the crowdfund investing framework used in the 2012 JOBS Act). They deeply understand the process, rules, disclosures, and risks of capital formation from both the entrepreneur's and the investor's points of view.

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