How To Buy Pre-IPO Stock 

It’s fairly easy to buy shares in a company when the stock is traded publicly. But what about pre-IPO stock from companies that haven’t gone public? Although not as popular as buying stock on Nasdaq or Dow Jones, it’s often possible to buy pre-IPO stock when you know how to take the right approach.

What Is Pre-IPO Stock?

Pre-IPO stock includes stock in any company that has not held an initial public offering (IPO).

Privately held companies have several reasons for avoiding the public stock market. For one thing, it takes a lot of paperwork to go public. Companies have to divulge a wealth of information about their expenses, revenues, marketing spend, and other financials.

Additionally, owners might want to keep the company private so they do not have to answer to new shareholders. By remaining private, they can make more independent decisions without concerns that, for example, corporate raiders will oust executive management or short sellers will drive the company’s share price lower.

Companies that haven’t gone public can still have stock. Amazon (AMZN) popularly paid many of its early employees with shares to make up for lower salaries.

The employees accepted stock options because they believed in the company’s vision and thought that their shares would become extremely valuable one day. They were right. Shares of Amazon typically trade for more than $3,000.

Investors can also receive pre-IPO stock in a company. The amount of stock they own influences how much control they have over the company’s direction. Exceptions to this rule exist. For example, Alphabet (GOOG) founders broke their shares up into two classes. The idea was that the share class held by founders had significantly more voting rights, so they would never lose control of their company’s strategy and vision.

The investors also hope that the company will eventually go public, at which point they have a clearer idea of how much their shares are worth. Owning enough shares in a successful company could generate millions of dollars as soon as the IPO happens.

Is It Smart To Invest Pre-IPO?

Like all investments, you never know what will happen when you invest in pre-IPO stock. When done strategically, though, it can add significantly earning potential to your investment portfolio. 

The big risk in buying pre-IPO shares is that you might have limited information regarding the company’s financials, activities, strategy, vision, business model and risk factors. Without enough information, it’s difficult to make a smart decision.

If the company goes public and a lot of people want to buy shares, you can expect your shares to increase in value quickly. If the IPO flops and the initial shares sell below the IPO price, you risk losing money. At that point, you will need to decide whether you want to sell or hold your shares. If your original investment thesis fails to play out as you expect, and shares fall, it’s possible you don’t have information that other “smart money” investors have.

Keep in mind that buying pre-IPO shares will, more often than not, require a substantial investment. Companies don’t want to sell you a few shares. You will need to meet financial qualifications that show you can withstand a potential failure. Few successful startups care whether they can attract a few thousand dollars from you. They want hundreds of thousands or even millions from investors willing to take big bets on them.

Is It Safe To Buy Pre-IPO Stock?

It’s difficult to say whether it’s safe to buy pre-IPO stock. As long as you know the risks and can bounce back from (potentially) losing a large chunk of your investment, buying pre-IPO stock is nearly as safe as buying publicly traded stock. There are dangers associated with stocks that are newly public, such as insider lock-ups, however. After fixed time periods, insiders can sell shares which can act as a drag on share price.

You can make investing much safer by learning as much as possible about the private company before you choose to buy any shares. Depending on how much money you have to invest, you might even get to sit down with the CEO or other executives to talk about the company’s past and its plans for the future. You can also ask to see documents showing how the company makes and spends its money. 

If you choose to buy pre-IPO stock, you’re essentially entering a contract with the company. It’s smart to have an experienced lawyer review the terms to help you decide whether there’s a “devil in the details” that you missed in your own examination. If it seems too risky, look for other opportunities.

How Do Companies Sell Pre-IPO Stock?

There are three popular ways that companies sell pre-IPO stock. 

Stock options are used to compensate employees. In this case, the employees “buy” shares with their labor. They might be able to sell their pre-IPO shares on private platforms, but that depends on whether their employer forbids this. The company can add numerous restrictions that tell owners how they can use their stock options.

Venture capital firms and angel investors can also buy pre-IPO stock. You’re going to need a very large amount of capital to make this move, though. If you can’t commit more than $100,000, it probably isn’t an option for you. Then again, you could indirectly invest in a pre-IPO company by purchasing shares in one of the company’s venture capital firms. It’s indirect, but it can work.

Finally, you can potentially take advantage of pre-IPO placements. With pre-IPO placements, the company offers some investors the opportunity to purchase shares immediately before going public. You can expect to buy the pre-IPO shares at a discount.

Whether it pays off depends on how the market responds to the IPO. Sometimes prices skyrocket after an IPO. Sometimes prices fall to nearly $0 after an IPO. For example, Facebook’s IPO famously led to lost shareholder value within the first few months as a publicly traded company, but soon bounced back and never revisited those original prices.

Platforms To Buy Pre-IPO Stock

If you want to buy pre-IPO stock without spending a lot of money as an angel investor or venture capital firm, you should turn to platforms that let current owners sell their shares online. Three of the most popular platform for buying pre-IPO stock are:

• AngelList,
• EquityZen, and
• ForgeGlobal.

AngelList Venture

AngelList Venture lets individuals and groups invest in venture capitalist firms. In most cases, you don’t buy pre-IPO stock directly. Instead, you put your money into the venture capital firms that support startup businesses. 

The platform helps you find venture capitalist firms that match your budget and investment goals. Most companies set minimum investments (usually at least $10,000 per quarter, or $40,000 per year). 

AngelList’s Managed Funds feature puts your money in the hands of an investment professional. This might appeal to you because the managers ensure that they diversify your investments. That way, you increase the odds that you will generate returns while you protect yourself from losses.

EquityZen

EquityZen provides a marketplace where pre-IPO stockholders can sell their shares to interested buyers. You will find a broad range of options on the marketplace, including popular companies like ByteDance (the owner of TikTok) and SpaceX.

You can also use EquityZen’s managed funds to diversify your investments in pre-IPO companies.

ForgeGlobal

ForgeGlobal takes a similar approach as EquityZen in that it provides a marketplace for selling and buying pre-IPO shares. Individual share owners can put their stocks in the market. Also, companies can sell their pre-IPO shares directly to interested investors.

ForgeGlobal has solutions for institutional and individual investors.

How To Buy Pre-IPO Stock Directly

Depending on how much money you have to invest, you could potentially buy pre-IPO stock directly from private companies. To do this, you will need to play the role of a venture capitalist or angel investor.

The question remains: How do you find a company seeking investors? Several avenues could lead you to a successful business that hasn’t gone public. 

Talk to Financial Institutions

Let financial institutions know that you’re interested in investing in private companies. They might have clients looking for investors. Once the financial institution makes the connection, you can talk to the owners and current investors about your options.

Attend Startup Competitions

Startups often seek investors by presenting their products and services at competitions. Consider events like Startup World Cup, Collision, and U.Pitch. These and dozens of other events function like large versions of Shark Tank. Presenters pitch their concepts. Audience members decide whether they want to invest. 

Don’t expect to invest in a pre-IPO company during startup conventions. Instead, use them as opportunities to learn about companies you find interesting. You can approach the owners during an event and schedule a meeting at a later date. That way, you can think about your options and do some research before committing your money.

Contact Companies You See in the News

Have you recently seen a news article or segment about a private company that you think has potential? Why not send them an email expressing your interest in becoming an investor?

This is typically a way to connect with smaller companies. A large private company like ByteDance isn’t going to respond to email solicitations. A small startup looking for investment capital, however, might want to talk to you about working together. In return for your investment, you can negotiate a certain number of shares in the business.

Is Secfi Safe?

Secfi has gotten a lot of attention over the last few years by releasing reports about how much money employees can lose when they do not know what to do with their stock options.

The average employee who owns pre-IPO shares rarely knows how much those shares are worth. That makes it possible for savvy buyers to purchase shares for much less than their real values. Secfi wants to help people understand what they own so they can get a fair price for their stock options.

Secfi doesn’t typically work with individual investors. Instead, it focuses on employees, startups, and institutional investors.

Is Secfi safe? Plenty of people say that using Secfi has helped them get more money for their shares. The company seems to believe in its mission. With that said, all parties will want to use caution. There is always a risk that Secfi could get valuations wrong. If that happens, you could actually end up making less than you would selling shares on a marketplace website or holding on to your shares until the company goes public.

As with anything involving shares and investing, there is some risk to using Secfi. That’s true of every stock buying and selling option, though, especially when dealing with pre-IPO stock.

Is Nasdaq Private Market Worth It?

Nasdaq Private Market is the private side of Nasdaq. Its software arranges share buybacks, tender offers, and similar funds.

In addition to private company stock, it can help you invest in auction-rate securities, limited partnerships, bankruptcy claims, whole loans, and other products. The service has been operating since 2004 (at the time, it was known as Restricted Stock Partners, Inc).

Whether Nasdaq Private Market is worth it for you as an investor depends on what you choose to buy.

• Do you do a lot of research before deciding to invest in a startup?
• Do you know how to diversify your investments to protect against major losses?

If you’re an experienced investor willing to put in the work, Nasdaq Private Market could work for you just as well as any secondary marketplace. It all depends on how you use it.

How To Invest In Pre-IPO Stocks Indirectly?

Investing directly in pre-IPO stocks often requires a lot of money. If you don’t have hundreds of thousands of dollars to invest, you can try investing indirectly in pre-IPO stocks.

How? Usually, you would buy stock in the parent company. For example, you can’t buy stock in WhatsApp, but you can buy shares of Meta Platforms (previously called Facebook).

It’s usually easy to find which corporation owns a company. Just search the internet. If the parent company is publicly traded, you will find that information in a second.

You can also invest in capital investment firms with interests in a company you like. This approach will likely take a lot more time and research. Start by learning which capital investment firms are public. Then, you can review their financials to see where they put their money. If you find a company you like, you can invest in it indirectly by buying shares of its investor.

How To Be An Angel Investor

Before you start contacting companies about becoming an angel investor, you should make sure you meet the right qualifications. The SEC has rules to protect people without enough money from becoming angel investors. It’s a risky move, after all, so the qualifications make sense.

To become an angel investor, you must earn at least $200,000 per year for two consecutive years (if you’re married, that amount goes up to $300,000). Alternatively, you can prove that your household has at least $1 million in assets you can invest. That doesn’t necessarily mean you need $1 million in cash. The assets could be real estate, minerals, stock, etc.

Joining an investor network is one of the most effective ways to become an angel investor. That way, you can work with other people to get information about upcoming opportunities. You don’t have to do all of the legwork on your own, although you will want to double-check what you hear before you invest.

Buying pre-IPO stock is more difficult than buying stock in a public company. It isn’t impossible, though. And it could boost your ROI significantly.

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