My Breakdown Of Freetrade’s Exit & The Basics Of Startup Investing
Freetrade is a UK-oriented investing/trading platform. As a relatively young company with big ambitions, they set out to acquire their first loyal customers and put their name out there on Crowdcube back in July 2016. Crowdcube is a crowdfunding platform, where (usually) Direct-to-Consumer, consumer goods and retail-focused startups either raise capital, acquire customers or do both! Crowdfunding platforms give startups an opportunity to pitch their product and their company to would-be customers/investors.
In January 2025, after ~10 rounds of crowdfunding and a few institutional funding rounds, IG Group announced that they would be buying 100% of the company for £160M. There was a huge uproar amongst the crowdfunders/customers, as most of them received peanuts compared to other shareholder groups.
Before you dust the cobwebs on your pitchforks and start plotting a class action lawsuit against Freetrade, this is not very controversial in Venture Capital (VC), where 90+% of startups fail and investors end up with nothing. Let’s explore the basics of Startup Investing and dissect this tragedy further in this blog post!
What’s the difference between investing in Startups and larger public companies?
Not only do most startups fail, but they also are extremely risky investments.
- They are illiquid: You can’t sell your stake in Freetrade or another startup you backed as easily as selling your Tesla shares. Typically startup investors can only cash in at a liquidity event (a sale, IPO or liquidation)
- There’s little information: In new markets, there’s nothing to base your analysis on, making due diligence more difficult and less reliable. It’s a leap of faith!
- There’s a larger, relative regulatory risk: Can this group of trailblazers successfully push a compliant product? Also, large firms can handle a fine or two, startups will go bust.
When there’s a 90+% chance of losing all of your money and a slim chance of backing the next Facebook or Apple, savvy VC investors will do all they can to limit their downside. We can discuss some of these additional protections in the later sections, but one obvious demand would be to ask for a larger share of the company when the company is in its infancy.
How do you value a startup and the investment round?
Valuations tend to be more qualitative for younger startups (especially pre-seed ones) while scale-ups (Series A+) could use revenue or EBITDA multiples of comparable publicly traded companies as a baseline. Using Freetrade as an example, their latest 2023 crowdfunding round have raised £2.27M. Here’s some quick maths:
- At a share price of £2.60, that means there were 873k shares bought by crowdfunders in this round
- Before the round, Freetrade is valued at £225M (pre-money valuation)
- Because they raised £2.27M, their post-money valuation, or the valuation after the round, is £227.27M
For crowdfunding, the platforms try to generate a buzz like IPOs, by showing huge figures like 300% oversubscribed on the websites to draw more investors in. Crowdcube handles this by letting companies release more equity to crowdfunders.
Where can you invest in startups?
Besides the crowdfunding platforms, investors can either invest directly as an Angel Investor (common in smaller companies) or through a third party. Angel Investing syndicates are just a group of angels pooling their money together to make investments. Venture Capital funds can also help institutions like Family Offices, Pensions and Sovereign Wealth Funds invest in startups.
Why are there so many share classes?
Companies have different share classes to control and segment the rights of different investor groups. Even large public companies have different share classes to, for example, make sure Warren Buffett has the majority of the voting rights for Berkshire Hathaway.
For startups, especially venture-backed ones, things can get really juicy and complicated. Freetrade has 9 share classes from one of their filings on Companies House. You can find the full description of each Share Class’ characteristics on the same filings, here’s a (long) summary:
- Most companies control voting rights by having two main share classes. Both classes will have the same rights to the capital distributions, earnings and dividends from the company, but one class would not be entitled to vote. In Freetrade’s case, A ORDINARY Shares are the ones with the voting rights and B INVESTMENT Shares don’t have voting rights. I suspect founders hold A ORDINARY Shares while crowdfunders and employees hold B INVESTMENT Shares.
- Typically, shares labelled “Series” are bought by institutions (VC funds) in funding rounds like a Series A round. In Freetrade’s case, Series A and Series B shares correspond to the shares bought by Molten Ventures and other funds back in 2019, 2021 and 2022.
- The DEFERRED and G1 ORDINARY Shares act like incentives, perhaps converting to other share classes when the company hits some of their growth KPIs. In Freetrade’s case, since they got acquired, management could make a case to “unlock” these shares
- Lastly, the SERIES B1, B2 and B3 shares are a little unorthodox. These were hidden nicely in one of the filings on Companies House again, right after the end of the Crowdcube campaign in 2023 (see below).
What are the protections demanded by investors?
Diving deeper into the purpose of creating these 3 share classes in Freetrade’s 2023 crowdfunding round can give us some insight into what VCs are pushing for in their investment negotiations.
Let’s start with the easiest, SERIES B3. These shares were present in their latest crowdfunding campaign on Crowdcube (shown below). The B3 shares have downside protection in the form of liquidation preferences. This means that if the company goes bust or gets sold for a measly amount, B3 investors will get their money back first up to the amount they negotiated (1X in this case).
B1 and B2 shares are more complicated. You might have noticed that B1 shares were bought at £2.08 per share. At exactly 80% of the price crowdfunders invested in (£2.60). I am guessing that this is another common carrot Freetrade dangled in front of existing institutional investors who participated in the Series B round. This allows existing investors to top up their stake at a small discount (usually 20–25%). B2 shares, on the other hand, are almost free. Again, this can be allocated to other institutional investors for free to protect them from being diluted in this crowdfunding round.
What do these protections look like in Freetrade’s example?
From what we know, most crowdfunded investors got back £1.19 per share while B1 and B3 investors got a higher share price (grey cells in the table below). If we assume that DEFERRED and G1 shares also get the £2.60 share price, SERIES A and SERIES B shares get 1X liquidation preference (the share prices were in a filing on Companies House) and B2 shares get the same price as SERIES B shares as they were compensated to Series B investors, there would be about £4M left over, enough to pay for legal and advisory fees.
These protections don’t usually get included in the share classes for crowdfunded investors. There isn’t an incentive for crowdfunding platforms, Freetrade or the VCs to negotiate this for them.
Conclusion
Hope this is a useful introduction to how startup investing works through my breakdown of Freetrade’s exit. The crowdfunders got a bad deal because the sale proceeds were first allocated to investors with liquidation preferences. Although there’s nothing illegal about this, I feel that crowdfunding platforms and startups need to proactively disclose these key details instead of letting someone like me dig through their filings on Companies House. To all you Freetrade crowdfunders out there, I’m also transferring my portfolio to Trading212 — see you there!
