Pre-IPO Shares: What, Why, and How to Invest in Startups?

Share on facebook
Share on twitter
Share on linkedin

To raise funds, many companies offer Pre-IPO shares to the general public. The term “IPO” stands for “initial public offering” and it occurs when a privately held company offers shares of itself to the public for the first time.

Pre-IPO is attractive because it allows investors to buy shares of a company at a steep discount before the stock is listed on the stock exchange. Selling the stock at a discount makes sense because it allows the management to tackle any financial uncertainty leading to the public offering and the initial days of trading.

For investors, pre-IPO shares are a golden opportunity to make huge financial gains if the price goes up. However, you should note that pre-IPO investing is sometimes offered only to high-net-worth individuals because the management wants to sell large blocks of stocks.

The agreement also comes with a short-term lock-up period. Irrespective of the price, the lock-up period prevents the buyer from selling the stock until a specified time period.

What Are the Advantages of Pre-IPO Shares?

No one can ignore the overwhelming benefits of purchasing stocks at a steep discount. It is common for companies to offer stocks at half the initial list price. The main benefit of investing in pre-IPO shares is the opportunity to get exponential returns on your investment.

Buying the stock at a bargain will also protect you against price decline. For instance, you will be safe if the pre-IPO purchase price is $10 and the stock price declines from $20 to $15 after the IPO launch. In this scenario, the safety net of $10 a share is a huge incentive because you can still sell the stock at a profit if you feel that the price will decline further in the future.

Apart from these benefits, savvy investors often buy pre-IPO shares as it gives them a chance to build long-term wealth. In fact, many individuals and startups have taken this opportunity to amass billions of dollars within a few years.

Are IPOs a good investment?

IPOs need the same due diligence required by other stocks. Just like other stocks, you should carefully evaluate the future growth prospects of the IPO. If an IPO is generating a lot of interest, it doesn’t necessarily make the IPO successful. In reality, the success of the IPO depends on a variety of factors, which requires foresight.

However, a higher expected demand generally leads to a higher first-day return. Also called IPO pops, the average first-day returns of the IPO are 18%. According to NASDAQ, recent years have seen a much larger return. During the heyday of tech stocks, the IPO pop of high-tech stocks was close to 60%.

Can you invest in Pre-IPO companies?

Traditionally, pre-IPO stocks were only accessible to venture capital firms, institutional investors, and people with deep pockets. The technology and the surge in financial securities have leveled the playing field to a great extent. While you still need a reasonable financial background, it is still possible to find reputable companies like Urban Capital Network that allow investors to get started with minimal investment requirements.

Where can I find Pre-IPO opportunities?

You can buy pre-IPO shares from specialized brokers and financial advisors. These companies acquire stocks and resell them to potential buyers or they collaborate with other companies seeking investors.

If you’re interested in buying large chunks of stocks, you can get a list of accredited buyers from the NASDAQ private market or approach a company directly. Similarly, there are companies that offer additional options for individuals who are willing to invest at least $100,000. For smaller investors, you can find well-known brokers that can give you access to American and European markets.

You can also participate indirectly by investing in an ETF or a venture capital firm, which invests in pre-IPO opportunities.

How do I buy pre-IPO shares?

One of the easiest ways to buy a pre-IPO share is to open an account with a company that can give you access to such shares. There are a variety of companies that deal with pre-IPO listings. If you’re a seasoned trader, you can also ask your broker about pre-IPO share opportunities.

Some investors subscribe to trading news to get information about companies looking for investors who can buy their shares before the company goes public. Attending investment seminars and conferences is yet another method to talk to employees who are willing to sell their shares.

Can you sell IPO shares immediately?

In most cases, you cannot sell your IPO shares immediately if you purchased them before the shares started floating on the stock exchange. This restriction is often called a lock-up period. Company insiders, such as employees and large investors, are also restricted until a certain period. The lock-up period generally spans 90 days to 180 days.

Every company has a different lock-up period. If required, you can look at the S-1 filing with the SEC, which indicates the duration of lock-up. It is important to realize that lock-up periods are not mandated by SEC. To prevent hysteria and ensure stability, the company or the investment bank underwriting the IPO request decides the duration of lock-up, if any.

Pre-IPO Share Risks

Just like any other large-scale opportunity, pre-IPO is also risky. If you’re planning to buy shares before everyone gets in the game, beware of the following caveats:

  • Lack of Liquidity: Unlike the public stock exchange, you will be hard-pressed to sell your shares to private investors if you change your mind after buying pre-IPO shares. Under these circumstances, the only way is to wait for the company to start trading.
  • Lack of IPO Approval: If the company is selling pre-IPO shares, it doesn’t mean that it will go public. Before going public, each company must get approval from SEC and the stock exchange. If the approval is denied, it may take a while to dispose of the share.
  • Inexperienced Team: A team without prior experience in dealing with IPO can face hurdles along the way. When buying pre-IPO shares, it is also necessary to evaluate the history and experience of top management in running business affairs.

Final Thoughts on Pre-IPO Shares

Buying pre-IPO shares in a company is a great idea if you can accurately predict the future potential of a company. If everything goes according to plans, there are seldom better opportunities in the market.

Purchasing the stock at a lower price also gives investors a safety net to avoid losses. Overall, it is a golden opportunity certainly worth the hype. Talk with Urban Capital Network about Pre-IPO share investing opportunities.