AdministratorNovember 22, 2020 at 2:03 pm
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.
MemberDecember 10, 2020 at 2:39 pm
You have an interesting position on this company.
My first thought, after just a quick look at their financials:
- Revenues down 20% – yes COVID, so take it with a grain of salt
- A Net Loss of over $5.6M
- Short-term Debt of over $8.4M (an increase of 41%)
- Cash-on-hand of just over $208K
- A 3-month revenue average of just under $60K – It is nice to see revenues cover COGS and operational expenses but it will take some time for $60 a month to put a dent in that debt.
I wanna steer way clear of it.
Still, you make a compelling argument. My only concern is the potential for them to back out and getting stuck long-term. Then I’ve invested in a company that, on paper, looks very scary to me.
Because it’s not set in stone, and their numbers go against my investment plan, I think I’m going to pass. Now, if I was a client of theirs and liked their products, I could see the perk as me simply updating my wardrobe, and then if I happen to make money, great, but I’m not in that position.
AdministratorDecember 11, 2020 at 4:44 pm
Completely agreed that there is still substantial risk; I hope I wasn’t giving the impression that there’s absolutely no downside risk here!
Again, I was investing purely because the value of the clothes credit basically gave me a massive buffer, so I don’t want my position here to be miscontrued as “this is a great investment” (then again, I’m not saying it isn’t; there are several big-name investment services out there that think have recommended earlier rounds several times).
That being said, it could still go to zero before IPO or they don’t IPO and I get locked in for a lot longer than expected; but technically I’ve already gotten $0.75 on each $1 back in store credit (assume my equity becomes worthless), and still gives a potential upside, so it’s the type of risk asymmetry that fits my personal risk / reward profile.
That begs another question – would I normally spend $500+ at a fashion store like this? Probably not. But these jeans are mighty comfy!
MemberDecember 11, 2020 at 4:46 pm
I totally get it, and I almost jumped on because I do need some clothes. You didn’t give the wrong impression. I was just tossing my hat into the ring.
I’ll have to check out the jeans 😆.
Log in to reply.