What is an investor buying? - Shares of stock representing percentage ownership in a business.
How could an investor make money? - Investors make a return typically when, and if, the company is acquired by another company, or when the company has an IPO and its shares become tradable on an exchange. If the company raises money again by offering equity at a higher value, under some circumstances investors can sell their shares during the new offering.
What are the risks? - It may be very difficult to sell your shares. If it is not possible to sell your shares, the most likely exits for an investment are if the company is acquired by another company or decides to go public and list its shares on an exchange. It could take years before these options become possible for the company and many startups fail before they reach these goals. If the company is a private company, the amount of information it is required to disclose about its operations and plans can be limited. The limited amount of information available can make it difficult to accurately value the company and determine a fair price to pay for the investment. Investors also face a risk that a company may issue large numbers of additional shares in the future which can dilute the investors ownership stake.
Why issue this? - Common equity allows pre-revenue and revenue producing companies the opportunity to raise capital and offer investors the greatest potential return because of the high degree of risk.