Private investments require not only the long view but a bit of X-ray vision. Betting on a start-up means multiple rounds of funding. From afar, it seems easy enough to deduce the value of the enterprise by taking the latest investment multiplied by outstanding shares. Think again. Headlines citing the billions of dollars a start-up is valued at in its last round of funding can be misleading.

For a start, nascent companies often have different share classes. Later investors putting up more capital get preference in the case of any liquidation. These later rounds do not reflect the valuation for all shareholders.

Funding round valuations only reflect the last investment, not previous stages. Most of us dream of getting in early for the next Apple or Netflix. But early stage investors may well find themselves with less protection should the venture go out of business.

All shares are not created equal. First in does not mean first out in the case of trade sales or liquidations. Investors putting in money last should get the first call on any sale funds.

This applies to investment “exits” too. In an initial public offering each holding would normally convert into common shares — giving every shareholder the same price. But the company may receive a private bid (trade sale) instead of an initial public offering — particularly if the enterprise collapses. Then different rules apply.

Investors in start-ups often do not realise the inequity of their positions until it is too late. That does not diminish the popularity of venture capital funding. In the year to April 2018, UK venture capital trusts, designed for retail investors, raised £720m. This is the most in more than a decade. But visibility on the structure of early stage investments is even less clear in a fund. There are no special goggles to see through the murky ownership structures in venture capital investment.

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