Need to upgrade your wardrobe AND want to get paid? DBG on Wefunder
Here’s an example of a campaign that I’m investing in not because of the potential upside (although in this case there is some), but because of the perks.
In this case, I’m looking at Digital Brands Group currently on Wefunder.
First thing you’ll notice is that the security type is an uncapped Convertible Note with a 6% interest rate and 30% discount. Normally I’d stay away from uncapped convertible notes and SAFEs as it essentially means you’ll just get the (typically) smaller discount applied when it converts to equity.
But here is where things get interesting.
They have said in numerous places that DBG Brands plans to file their S-1 for an IPO with the SEC by November 27, 2020.
Assuming the IPO is in March 2021, that means your money could be locked up for about 4 months (maybe 1-2 months longer).
At IPO, they have said your Convertible Note will convert at a 30% discount with no lockup period. This means if the share price at IPO happens to be $10, you’d get it for $7 a share – and could immediately sell it for $10/share, netting more than a 30% gain (3/$7 = 43% gain).
So you lock in an immediate gain based on the 30% discount. Potentially less (if it drops in price one public), but potentially more if it goes up. And you aren’t locked in to a certain price until they set the IPO price, at which point the 30% discount is applied.
On top of all this, they are offering perks – e.g. $250 for $500 invested, $500 for $1,000 invested in DSTLD gift cards.
Risks: the risk of all this going south is not zero, but I estimate it to be relatively low risk right now. Let’s say coronavirus happens to spike and kill their sales again (despite a vaccine being so close), they could scrap the plans for IPO. Or a number of other things could lead to backing out of the IPO, meaning your money could be tied up longer (but still not zero unless they are to fail – which seems unlikely to happen so quickly, especially if they are filing their S-1). Also, shares could plummet by more than 30% the day of the IPO. In that case, you might get a little less back than what you invested; however, if you include the 50% bonus of gift card credit for DSTLD due to the perks, it still gives you quite a big price buffer to deal with any IPO day volatility.
For example – if you invest $500, the estimated baseline profits (assuming IPO share price doesn’t move) is:
Total final value: $250 gift card + 30% discount ($500*1.3 = $650 equity) = $900 at the time of IPO
ROI in less than 6 months is $900/$500 = 1.8X, with a very high IRR due to the short time period.
To lose money on this deal, something very bad would have to happen to the company that causes them to back out on the IPO, or your shares would have to plummet in value more than $400 ($250 gift card + $150 bonus equity) the day of opening, which is a $(650-400)/650= 61% drop in the initial IPO price. Probably unlikely.
For this reason, I’m investing (again) in DSTLD, mostly to update my wardrobe, but also because it is likely that I’ll also make a little money on the deal and the clothes will be a bonus.
Remember you will also have to pay short-term capital gains taxes assuming you sell in less than a year, and may have other taxes due to the interest gained on the Convertible Note.
Disclaimer: I invested in an earlier round of Digital Brands Group for the exact same reason – in addition to getting a $500 equity stake in the company, I got a $500 gift card to buy new clothes from DSTLD online. The clothes are definitely comfy, which is why I’m coming back for more.