Most Common Red and Yellow Flags in 2024 Equity Deals

Startup investing is time-intensive. Investors often screen dozens—or even hundreds—of deals to find a few promising opportunities, followed by extensive research to evaluate each company’s potential. Kingscrowd simplifies this process by doing the heavy lifting for you.

In addition to aggregating and rating deals, we’ve developed the Deal Considerations tool to help investors identify red and yellow flags. These flags highlight risks like potential failure, low growth prospects, or unfair deal terms. To provide context, we analyzed 857 equity deals rated in 2024 to identify trends.

  • Low Runway – Many startups begin raising funds with insufficient runway, increasing their risk of failure during or shortly after their campaign. When investing, ensure the company is raising enough to sustain operations until the next funding round.
  • Shareholder Stock Sales – Among 22 Reg A+ deals we rated this year, 36% included shareholder stock sales, a practice not allowed in Reg CF campaigns. While this can help founders and early investors cash out, it reduces the funds available for company growth. For example:
    • Moderate Example: Reticulate Micro allocated only 2.3% of shares sold in its raise for this purpose.
    • Concerning Examples: Mode Mobile (25%), Avvenire Electric (25%), and StartEngine (20%) allocated substantial portions, reducing growth potential for new investors.
  • Repurchase Rights – A staggering 30% of deals include repurchase rights, allowing companies to buy back shares at arbitrary prices. These rights are especially prevalent in Wefunder SPVs due to the deal’s structure. Repurchase rights only become an issue if used the wrong way.
  • Unclear Valuations – About 14% of the 558 rated deals selling common or preferred equity or tokens don’t publicly disclose valuations. Our team estimates valuations using share price, outstanding shares, and option pools, but discrepancies arise if founders issue additional shares post-disclosure. Without transparency, overinflated valuations can make deals less attractive. Investors should demand clarity from founders and platforms.
  • Outrageous Revenue Multiples – Deals with unjustified revenue multiples can hurt returns. In 2024, 11% of equity deals had multiples exceeding 75x revenue, a figure that jumps to 18% for companies with at least one year of revenue.
  • Poor Revenue Performance – Even if only 5% of deals reported revenue drops of 50% or more, it actually represents 10% of deals with at least two years of revenue history. Such declines can indicate companies raising funds to survive rather than grow.
  • Uncapped Future Equity – Deals with uncapped Convertible Notes or SAFEs are hazardous, representing 2% of all deals but 5% of these specific securities. Without caps, early investors risk dilution and uncertain returns.

Deal Considerations is a tool available to EDGE users on all rated equity deals.