Investing in Pre-IPO Companies

Purchasing pre-IPO secondaries can be a way to gain early exposure to highly valued companies. The private markets, for example, have allowed investors to own a stake in companies like SpaceX, Cerebras, and Figma before they went public.

Picking the right companies can be difficult. But if you’re confident in your investment criteria, the bigger problem is access. Historically, if you had your eye on a private company and wanted to get equity, you’d typically either have to be a well-established institutional investor or VC, or need to deal with a personal broker.

With institutional-grade investing platforms like Mirai Capital, however, you can buy private company shares from existing shareholders, provided you meet the required accreditation criteria.

Considerations When Investing in Pre-IPO Companies

Understanding Your Upside

Buying private stock isn’t as straightforward as investing in the public stock market, so it’s important that you take time to understand what you’re buying. You’ll want to consider the company’s valuation, the terms that come with the stock you’re purchasing, and what kind of ownership stake you’ll have in that stock.

Valuation

When you’re assessing a pre-IPO investment, one of the most important factors can be the company’s valuation. Private companies generally do not disclose their valuations publicly and offer limited financial information. However, investors can use several methods to estimate what a company and its shares are worth, including:

  • Comparison to similar publicly-traded companies
  • The company’s 409A valuation
  • The implied valuation from the company’s last capital raise
  • Transaction data on investing platforms

Ownership Structures

There are several types of investment structures in pre-IPO secondary market investing, and it’s important to choose the one that aligns with your goals. Two common investment structures are:

Direct ownership

You hold the shares themselves, as well as the rights that come with them. Direct ownership may not be an option for companies that limit access to their cap table, and in some cases it may require a higher minimum investment than other opportunities.

Funds (also known as “special purpose vehicles” or SPVs)

Funds could allow you to access private companies at lower investment minimums because they pool capital from multiple investors. A fund investment may be less administratively burdensome than a direct investment because the fund manager handles certain matters on the fund’s behalf, which may include applicable tax reporting documents.

However, with funds, you’re not buying shares of the company directly — you’re buying a membership interest in the fund, and the fund owns the underlying shares of the company (or in some cases, the shares of another fund). As a result, you won’t have direct control of the underlying company shares.

Liquidation Preferences

When a company experiences a liquidity event such as an IPO, merger, or acquisition, the proceeds are distributed to its shareholders in an order determined by their share class or series.

When buying shares on the pre-IPO secondary market, it’s important to understand whether you’re getting preferred or common shares. Preferred shares may come with a liquidation preference, which can give priority over common shareholders when certain proceeds are distributed. If the company doesn’t make enough from its liquidity event to repay all of its shareholders, the common shareholders may get a smaller payout than they were expecting, or no proceeds at all.

Liquidation preferences can also include a multiplier. For example, a 2x liquidation preference generally means the holder is entitled to receive an amount equal to twice the original investment before proceeds are distributed to securities that rank behind it. A company may have multiple classes or series of preferred shares. It’s important to understand both the terms of your own liquidation preference, if you have one, and the preferences of the share classes ahead of yours.

Lockup Periods

Often, it might not be possible to sell your shares immediately when the company goes public. Many private companies have a lockup period, which is the length of time after an IPO where certain shareholders are restricted from selling their shares — commonly 90 to 180 days. Lockup periods help manage the potential impact of insider and early-investor selling on the public market.

When investing through a fund, its governing documents will determine how and when your interest is distributed after any applicable lockup period expires.

Managing the Risk of Incomplete Information

When you’re buying pre-IPO stock, the seller may have access to more information than you about the company, since sellers are usually employees or early investors. Unlike publicly traded securities, which generally have observable market prices, private company shares may have less transparent value and trading information. Private companies also aren’t subject to the same reporting and disclosure requirements as publicly traded companies, so they generally make less information publicly available. This may put sellers in a favorable negotiating position.

It’s important that you do your research, engage with a professional advisor if you need one, and evaluate how much you value the stock before deciding whether to invest. You should also be prepared to lose some or all of your investment.

To gain a more complete picture of a company’s potential, you could look at other indicators as a signal.

  • Sometimes the company sponsors its own buy-backs of shares from employees in a tender offer. The prices of these purchases are often publicly reported.
  • Following industry trends and the company’s revenue reports can also be informative. Many crypto companies like Ripple, Chainalysis, or Kraken disclose a significant amount of information publicly.
  • Changes in the holdings of existing investors may provide information about how those investors view the company.
  • If a fund holding the securities changes the shares’ valuation, that may provide information about how the fund currently assesses the investment. However, valuation changes can occur for a variety of reasons and may not reflect changes in the company’s underlying performance or future value.

Finally, if you’re using an investing platform like Mirai Capital, you can see the price of recent secondary market trades to get an understanding of what other investors are willing to pay.

Where Can I Access Pre-IPO Stock?

The hardest part of pre-IPO investing can be gaining entry to the private markets. There are several methods investors use to buy private stock, each with different levels of access.

Traditional Brokers

Traditional brokerage firms can serve as intermediaries for accessing pre-IPO stock. They’re often able to offer a bespoke service and may be able to handle complex buying requirements. However, these firms tend to be hard to find, and typically focus on institutional investors. Depending on the transaction structure, investors may have limited visibility into the seller, as well as the available inventory, pricing, or transaction process. When they work with individual investors, traditional brokers often have high minimum investment thresholds, which may make them inaccessible to some.

Tender Offers

Tender offers allow eligible shareholders to sell their securities directly, at a specified price and during a defined period. The company itself often initiates a tender, and third-party firms may facilitate it.

Tender offers are typically only accessible to major or existing investors in the company. In some cases, individuals or family offices may access tender offers indirectly through a fund or other investment vehicle. Tender offers are also point-in-time opportunities, with the shares only available for a short window.

Online Investing Platforms

Investing platforms are similar to other marketplaces that allow buyers and sellers to interact. Some investment platforms allow you to see historical transaction data, which tell you how other investors and sellers perceive the value of the shares. Transactions are often more self-directed, which may be a benefit or drawback for some investors. Investing platforms often have lower minimums than other methods of buying private stock.

Recap

There are various ways to access pre-IPO stock, but institutional-grade investing platforms like Mirai Capital are a simple way to navigate the process and typically require relatively low investment minimums. Provided you meet the required eligibility criteria, you may create an account in minutes and start browsing one of the world’s largest gateways to the private markets.