18 January 2022
IPOs (Initial Public Offerings) can be compelling for any investor. Read this comprehensive pre IPO stock guide as we discuss:
Every startup employee looks forward to a stock options offer. It’s worth mentioning that stock options play a critical role in their (employees) compensation package. When a company goes public, many of the employees are not only filled with excitement, but they also anticipate considerable riches. While success does not happen to everyone, employees can earn colossal amounts from Pre IPO stocks.
Unlike already established organizations, startups cannot provide workers with extensive perks and salaries. However, they can entice hardworking employees with the idea of pre-IPO stock options. In this case, the employees will own a section of the company and get a chance to become millionaires.
Still, Pre-IPO stocks can be risky and are not guaranteed to make money. If the company does not go public, the employees will have limited options to make money.
Through investment banks, private companies normally dispose of pre-IPO shares to institutional investors at a discounted price. Often, many private companies sell pre-IPO stocks to raise money before they finally avail shares to the general public. Not all private companies with an imminent IPO sell pre IPO stocks.
Today, many established private companies take time before finally going public. Often, accredited investors who know of a planned initial public offering end up getting the most significant shares and increasing their chances of earning a big chunk of ROI. Many times, before some private companies go public, they will have already conducted a pre-IPO.
Sometimes an organization’s pre-IPO shares are what you require to expand your portfolio. These shares are less susceptible to market shocks and experience minimal volatility so long as the private stocks remain private. Still, private shares often face increased liquidity risks, which many investors may not be comfortable with.
Private Pre-IPO investors are also highly likely to fall victim to fraudulent practices that occur both online and offline. Aspiring pre-IPO stock investors should remain vigilant to guarantee their security and avoid unexpected losses.
Startups can transform from little-known firms to irresistible organizations with increased valuations and unbelievable status in the pre-IPO stock industry. However, they can also come crumbling down, leading to untold losses. Private organizations are aware of the risks, so they offer pre-IPO stocks at highly discounted prices.
By investing in pre-IPO stocks, investors increase their chances of earning long-term revenue. However, always research the company extensively to determine the value of your investment. Remember, private firms are not under any obligation to reveal their financial information to the public.
Again, consider investing a small percentage of your money in a pre-IPO to avoid disappointments in the future. What if you are an aggressive risk taker? Sometimes you can earn high multi-bagger returns just by risking. Yet, worth noting is the higher your investment, the higher your potential risk.
Choose to risk only if you can withstand significant losses. Determine whether you plan to invest in authentic blue-chip organizations on a long-term basis or not before risking your hard-earned money.
Accredited investors understand how to evade the risks associated with pre-IPO stock investing, which explains why they are willing to buy stocks before a private company goes public. The available conventional rules and regulations on raising capital safeguard the average investors with little to no technical understanding of the market. However, pre-IPO startup investing is not a preserve of high-net-worth angel investors. Retail investors can opt to invest a small percentage of their money in pre-IPO stock.
Many pre-IPO stocks are offered in one of the following three methods.
Venture capitalists and angel investors who raise money and invest in startups can usually acquire large blocks of shares, which they later sell at a high price.
Sometimes stock options are offered to employees who can later resell their shares while adhering to set restrictions. Other crowdfunding platforms and intermediaries can also purchase large blocks of shares from accredited investors to dispose of them to new investors.
Acquiring shares through stock options can be difficult if you are not an employee or a key player in the organization. Interested parties can, however, purchase shares from secondary markets where early adopters resell the stocks.
Beyond angel, seed, and venture capital investing, other types of investors can gain from pre-IPO placements a few months before the IPO. As we’ve learned before, IPO underwriters often avail large blocks of shares.
Accredited investors like hedge funds and private equity firms authorized to invest in pre-IPO stocks gain from a discounted price due to their (the shares) potential to generate colossal amounts of money. Pre-IPO placements occur when IPO underwriters avail stocks at reduced prices to a section of investors before an initial public offering.
Aspiring investors can leverage the following tips to determine and get pre-IPO investment opportunities. Some established discount brokers like NASDAQ and NYSE, for instance, facilitate access to some pre-IPO stocks. Each brokerage sets different rules for participation, but buyers should open an account with the broker they plan to collaborate with. Here are some tips to help you understand how the procedure works.
To invest in a pre-IPO through some brokerage firms, investors should either:
With these regulations, the firm can restrict IPO access to its VIP customers. Some brokerage firms offer some more lenient options. At Fidelity, for example, customers with $100,000 can participate in initial public offerings managed by underwriter Kravis Kohlberg Roberts. The firm restricts participation to customers who have traded more than 35 times within 12 months and those with $500,000.
Suppose you are eligible to participate in a pre-IPO; you can go ahead and request your preferred number of shares. Remember, there are no guarantees that you will get the total number of shares you request. The company may allocate you a pro-rata share quantity instead. Consider your request as the highest number of shares you prefer getting should they be available.
Often, financial advisors and brokers participate in pre-IPO trades. They may have bought stocks that they wish to dispose of or sell on behalf of sellers seeking buyers. Find out about pre-IPO from your current broker or collaborate with a brokerage firm specializing in pre-IPO sales. Here are some brokers you may consider working with.
Buyers should understand that brokers can impose regulations and rules on the pre-IPO stock resale process. They may also demand that investors meet specific regulations. Buyers are not guaranteed to get stocks from a specific organization from any stockbroker.
You can purchase pre-IPO stocks by assuming the role of a venture capitalist or angel investor. If you finance startups in their initial stages, you can buy stocks. Suppose the company finally goes public, you will have a better chance of reaping high returns on investment. Here are some tips to help you understand how to purchase pre-IPO stocks directly from private firms.
Reach out to non-banking organizations, banks, and accounting institutions and determine whether they know any private firms wishing to issue pre-IPO stocks.
Participate in startup pitch competitions and events and seek authentic companies worth investing in. Attending such events is an excellent way of meeting and developing connections with experienced players and investors in the industry.
Watch current affairs. Activate email alerts to know when institutions seeking investors plan to go public. Reach them and determine whether they plan to offer pre-IPO stocks.
Subscribe to crowdfunding platforms such as AngelList and FundersClub, through which you can invest in startup firms directly.
Join stock tokenization channels that change pre IPO stocks to cryptocurrency, or blockchain-oriented tokens. Consider trading them for cash whenever you want.
Networking plays a critical role in the world of initial public offering procedures. Your ability to purchase pre-IPO highly depends on the strength of your network. As more financial and technology-based events go digital, you do not have to be in New York, China, or even the Silicon Valley to connect with angel investor organizations, promising entrepreneurs, venture forums, and business incubators. If some markets and startup performance compel you, consider reaching representatives of the companies and determining their mid-term and long-term goals.
You can buy shares from employees with stock options. ESOP is an employee benefit program that grants staff ownership interest in the organization. An Employee Stock Ownership Plan gives the funding company, selling shareholder, and participants specific tax benefits. Often, companies utilize ESOPs as a joint finance strategy to link the interests of their staff with the shareholders.
Investors can purchase re-IPO shares through the IPO access product by Robinhood, also an affiliate of FINRA, regardless of their account value, and the magnitude of your investment on the channel. The firm seeks to support individual investors to participate in IPOs.
Robinhood recently announced its intention to go public. The stock trading platform aims to avail up to $770 million to its users. Worth noting is that many companies offer less than 5% equity for their regular retail investors. Robinhood’s investor representations were disclosed to the general public, which included up to 31 million users throughout their platforms.
Purchasing pre-IPO stocks may seem like a difficult task due to the complex investor criteria, risks of directly investing in companies, and minimum investment obligations. If you are not eligible or are uncomfortable with the risk but still want to venture into the pre-IPO market, consider investing indirectly in pre-IPO companies.
Do this through Private Equity Exchange-Traded Funds or publicly held venture capital firms. These investment options expose you to a wide range of private equity investments, reducing your potential achievements but also cutting down your risk. Investors should understand that private equity funds are controlled actively but may attract significant fees.
Speculative investments and external stock transactions come with tremendous risks. After buying shares, your money may be restricted for a prolonged period. Further, some private companies may put their plans of listing on stock exchanges on hold.
Seasoned company shares have performed dismally before within the first or two years after an initial public offering.
Some startups fail tremendously, causing investors untold losses.
Suppose companies do not go public you want to incur the least losses possible. As a result, investors should be capable of managing their expectations.
The IPO industry is evolving fast, and today, you can invest in pre-IPOs through advanced platforms without being an accredited or angel investor.
You stand a chance to earn pre-IPO ROI when the company first goes public
Diligence is crucial in the world of pre-IPO stock investing
Investors can navigate their way to high ROI within a few years after the initial public offering
Income from dividends can be the peak of your investment
Research and consult financial advisors before investing in pre-IPO stocks from startups or even established private companies.
Adopt the cheapest services from reliable and transparent wealth managers or third parties during the pre-IPO stock investment process.
Consult experienced colleagues and private placement journals to verify your research and the firm’s valuation
Pre IPO stock investing involves a range of restrictions and numerous risks. Do your due diligence to understand the company you plan to invest in before risking your money. If you are a U.S. resident, be conversant with and meet the SEC’s authorized investor regulations to qualify. Remember, not all companies intending to go public offer pre IPO stocks.
Experienced investors are always watching out for potential tech startup pre IPOs because they can earn a high return on investment. For example, the leading businesses globally whose prevailing valuations surpass $1 trillion are all technology-based startups.
The ever-evolving technology nature and its strong potential for considerable financial growth explains the growing popularity of tech startups today. These startups are excellent investment opportunities, and buying a startup pre IPO is a decisive move that can earn you outstanding awards.
A pre-initial public offering is when founders sell off shares of their tech startup companies before releasing the initial public offering. Buying pre-IPO shares allow founders to raise enough capital to launch their IPO and scale.
Investing in a tech startup during its early stage can be an overly risky activity that many investors forgo. However, they can opt to buy the pre-IPO stock by investing during subsequent phases of funding.
Some founders offer more than one pre IPO before going public. Taking time before investing allows investors to research and assess the company’s potential and marketability for the targeted customer base and other aggressive investors. This setup is ideal for investors seeking to connect with numerous new companies in different industries, such as the complex tech space.
Experienced investors and big private equity firms prefer investing in tech startup pre-IPO stocks for various reasons, as we shall see below.
Investors can dispose of their stocks at a higher rate once the firm goes public. For example, venture capitalists can expect a ten times average ROI within the first five years. Further, such investors will continue receiving passive income via dividends. Many investors expect up to 15X ROI, which is a reasonable amount.
Pre-IPO tech startups offer reduced holding time frames. Once you invest in a tech-based startup IPO your stock holding period will range from three months to two years. However, you may have a more extended waiting period if you wait until the secondary offering before the company goes public.
The reason behind this concept is that secondary investors will initially have to wait until the tech startup goes public, an action that can take nearly ten years before finally happening. Again, this group of investors will need to wait for the startup to disclose its secondary offering before investing.
Before then, the share prices would have increased, and people who invested in the tech startup pre-IPO will be earning dividends already as secondary investors start their journey. Often, a higher ROI is only possible for long-term and established firms in the pre-IPO industry. However, some tech firms have delivered excellent ROI results between the first pre-IPO and the introduction of the IPO, like what happened with startups Pinterest and Zoom.
Emergencies and pandemics can have a massive effect on the economy, causing a share price drop in publicly traded companies. Pre IPO investments hardly suffer from societal circumstances that cause changes in the stock market because shares are still private. For example, the stock market suffered an overall downturn following the Coronavirus pandemic.
Even then, tech startups such as Amazon and Netflix experienced tremendous growth. Giant technology companies were not spared when Covid first hit the world, with some suffering more lossesthan tech startups. Any aspiring investor will appreciate this news because while the companies experienced losses, they still recovered fast.
The pre IPO stock industry can be volatile just as happens in the stock market. However, investors can reduce vulnerabilty by following the proper procedure, researching, and consulting. There are numerous benefits to gain, primarily when investing in an industry that is currently dominating the world of business, one that has surpassed the trillion-dollar barrier. Here are tips to help you invest in a tech startup pre-IPO like a professional.
Lending companies, banking institutions, and accounting organizations often have existing clients of early-stage startups seeking early-stage investors. Aspiring investors can leverage these organizations to determine high-potential opportunities.
Seasoned investors can contact their investment consultants or stockbrokers and seek assistance in identifying and investing in the right early-stage tech startups. Further, brokerage and trading firms that specialize in determining tech startup pre-IPO stocks exist. Such firms can also help investors invest in the right startups.
Reading through startup reference journals is one of the best strategies potential investors can leverage as a guide to investing in the right tech startup pre-IPOs. Apart from getting an opportunity to uncover innovative firms, business reference journals enable you to understand an early adopter’s perspective on specific services and products.
Some people claim that a section of startup journals is not credible enough, forcing individual technology startups to be less trustworthy and less marketable. However, Google is already doing everything possible to separate authentic pages from illegitimate and low-quality ones.
The search giant does so by arranging internet websites into backlink-rich communities and generating negative rankings on spam pages. Even then, upcoming investors should consider doing their due diligence to choose the ideal tech startups from some of the already established reference websites such as ProductHunt or Crunchbase.
The latter is one of the leading resources for information about startups, investing spaces, and prevailing industry trends, making it ideal for conservationists who intend to invest in various industries apart from tech. ProductHunt is the ideal reference medium for digital products from various tech startups.
Once you decide to venture into the world of tech startup pre IPO investing, consider building strong business connections. Doing so will help you discover and interact with leaders in the business industry, and get a chance to enjoy profitable investment opportunities in the future.
Startup accelerators and incubators are great mediums for your investment in high-potential technology-based firms. Well-initiated startup projects from some of the biggest companies like Quest Ventures and Y Combinator have facilitated growth for the largest tech firms like Dropbox and Airbnb.
Further, they have made a name for themselves for generating infinite value for potential investors. Remember, you are highly likely to discover and participate in an upcoming pre-IPO process through your robust network.
Crowdfunding and secondary market platforms like Republic, Webull, and AngelList facilitate pre-IPO processes and internal operations, making them more transparent and accessible for potential investors. As a tech startup pre-IPO investor, you can also follow the news and read through relevant information on startups that intend to go public.
With sufficient information, you can then contact the startup founders and give them your financial support. After that, you should be able to get a fraction of their startup shares. When dealing with startup founders, consider looking out for the following traits.
Angel investors are people that leverage their financial resources to invest in tech startups. They also play a role in developing an organization’s capital in exchange for shares. With the appropriate tools and a passion for planning, being an angel investor is more accessible today than before. Further, becoming an angel investor for a tech startup can be rewarding, primarily when you invest before the initial public offering.
If you are an eligible accredited investor, you are very close to becoming an angel investor. Remember, only authorized angel investors can participate in pre-IPO and security offerings. Becoming an angel investor and positioning yourself in the community is more than being accredited.
You will have to determine the total amount of your investment collection that you intend to allocate to angel investments. Remember, your angel investment venture should only take up between 5% and 10% of your whole collection. The reason for this is that liquidity from angel investments is relatively low, meaning it will be sometime before you can earn any ROI.
Pitching events play a critical role in ensuring that founders make their startups discoverable by seasoned industry leaders and investors. Doing so accelerates their plans of securing the capital they need to scale their businesses.
Startup pitch games allow you to understand the startup you intend to invest in better. Further, they are excellent avenues where you can meet other like-minded investors. What’s more, you get to interact with the target customers of your preferred startup. In the process, you will increase your knowledge and understanding of their needs.
Some of the prominent pitch events you should attend include the Y Combinator Demo Day and Web Summit. The latter is said to be one of the biggest tech conferences globally based on influence and scope. The competition is usually among the most inclusive in terms of participants and attendees.
Y Combinator Demo Day utilizes a more in-depth setup and practices exclusivity among leading investors and high-potential startups.
Syndicated angel lists are effective funding mediums where an investor can connect with compatible angels. Together, they can raise the required capital to build a specific tech startup pre-IPO. Unlike VC (venture capitalist) institutions which are not afraid of spending millions on increasing their return on investment, angel groups and syndicates close their investments at the thousands phase.
As a result, the latter is ideal for the startup industry. By being part of a syndicated angel list, you can be sure that you will stop being an individual investor. In this case, there will be less paperwork to handle. Up to 99 investors can invest in technology-based startups as a single group through an SPV (Special Purpose Vehicle). Doing so reduces the number of forms and applications there is to process.
By joining a syndicated angel group, you can develop a business network of tech startup pre-IPOs. Connecting with tech startup founders exposes you to other firms where you could be an angel investor. Through those startup founders, you can meet other tech startup pre-IPOs that may be ideal for you. You can also identify startups with high growth potential.
Stock tokenization is distributing an equal number of cryptocurrency security tokens to your tech startup pre-IPO shares. You can then trade the digital tokens in a process similar to the stock markets.
Tzero and Tzero is an effective stock tokenization channel through which private business shares can switch tokens into cash, easing stock liquidity. Further, investors can easily purchase and hold asset tokens as stock tokenization utilizes a peer-to-peer trading structure.
To ensure investors leverage private equity they should collaborate with reliable wealth managers. Such individuals have considerable experience in handling shares, stocks, and assets of well-established and authentic firms. They are experienced enough to inform you whether a tech startup is worth investing in or not.
Seasoned business investors understand that each investment opportunity presents a specific amount of vulnerability. To be on the safe side, consider making informed decisions before investing both in the stock market and the pre-IPO industry.
Many experienced investors are comfortable investing in organizations and startups that have been in the public space for some time. Only then, can they find comprehensive information on their growth curve and general success in stock market reports and charts?
Remember, private boards and firms are not compelled to reveal specific data to the public because of their business ownership formation. As a result, the data you can access about tech startups is restricted. Further, there is an imminent risk that the technology-based startup you have invested in may not survive.
When investing in a tech startup pre-IPO, you should learn how to appreciate both profits and losses. Investors should understand they can lose all their tech startup investment in a flash, especially during a volatile economic environment. The good news is companies understand such risks, which is why they offer shares at reduced prices to encourage early-stage funding and angel investment.
Many technology-based startup product expansion activities rely on software and applications. As a result, they can start operations at reduced costs enabling them to gain positive performance on small capital funds. Do not invest in technology-based startup pre-IPO if you have zero risk tolerance skills.
Collecting and examining the technology-based startup pre-IPO documents is much more than determining the risks. Doing so will also not provide you with a risk management strategy to help you finalize the buying process.
Ensure the tech startup you intend to invest in has proper documentation and is authorized to operate. For example, securities and placements by tech startup pre-IPOs have to be exempt or registered under the U.S. security exchange commission or securities regulator within your state.
SEC filings and documents like the prospectus must feature the startup’s standard operations, history, and financial position as audited by certified accounting and legal professionals. Potential investors can access SEC filings of a startup they intend to invest in through the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR).
This system provides public access to approximately 3,000 terabytes of institutional data per year. The information includes securities the startup offers, the firm’s financing operations, and maturity dates.
To successfully invest in a tech startup pre-IPO, you should be conversant with the investing process and the firm’s expected valuation. Usually, technology-based pre-IPO reveals its expected revenue growth. Investors should research and consult financial advisors to ensure the startup is authentic.
Many investors are interested in tracking and reviewing return on investment because the data they receive demonstrates the viability of the tech startup. Usually, ROI is expressed as a percentage, and you can calculate it using one of these formulas.
If the net return is higher than the general costs, the percentage ROI will be positive. However, a low net gain represents a negative return on investment.
After identifying the tech startup, you intend to invest in, start by putting in a small amount of money and monitor its performance. If you like the performance, consider increasing your investment in the startup. However, if the results are not appealing, you will only lose a small percentage of your investment. Did you know you know you can subscribe to angel groups and invest via capital development institutions?
Sometimes, both seasoned and novice investors are overly excited over the IPO price and the opportunity to invest in a successful tech startup can be overwhelming. Worth mentioning is that while some startups are highly successful, others are not.
As a result, every investor should adhere to investment rules and regulations to avoid losses. Know the market and expand your investment options. One of the most compelling features that venture capitalists and angels leverage is market timing. Consider being patient if you want to reap great benefits.
Another effective investing principle is maintaining low costs. Seek assistance from a brokerage firm on how to go about it. Ensure the broker you work with is reasonably priced and only choose the best firms with the least transaction costs.
A crucial guideline to adhere to is to beware of the risks involved and remain realistic in investment returns. Such skills will help you establish the best investments that align with your goals. As you gather more experience in the industry, managing these guidelines becomes more effortless, making the pre-IPO investing more manageable.
Investing in tech startup pre-IPO stocks can be financially beneficial regardless of the vulnerabilities involved. Investors can leverage the tips in this comprehensive article to reduce that risk. Take time and review the available options to increase your chances of identifying the ideal tech startup pre-IPO to invest in.
Adhering to these guidelines will help you remain realistic and avoid making significant investments too soon. Develop valuable connections with other tech startup investor networks. You will meet and interact with the ideal tech startup pitch competitions, business conferences and meet-ups, and angels list online through these networks.
Purchasing pre-IPO stocks can be challenging, and finding the available stocks in institutions is nearly impossible. Despite the numerous requirements and restrictions involved, investors can still buy pre-IPO stocks.
Use this article as a resource to understand the Pre-IPO stock world in depth. Analyzing these details will enable you to make an informed decision. Always evaluate all the restrictions and fees linked to any transaction you make or intend to make.
Remember, the funds and companies highlighted in this article are meant for informational purposes and are not a recommendation. Consult professional financial advisors before investing in pre-IPO stocks.