How to Buy Pre-IPO Stock

Most investors focus on public companies when looking for new opportunities. However, there is a way to earn even greater returns.

This is done when you buy pre-IPO stock. This allows you to invest in a company before it starts trading on public stock exchanges like the NASDAQ or New York Stock Exchange (NYSE).

It’s not uncommon that buying pre-IPO companies can lead to significant gains. Just think about what your portfolio could be worth if you had purchased shares of Uber or Airbnb while they were still early-stage private companies.

Although it’s not uncommon to see 10x, 50x, and even 100x returns pre-IPO, there is also a risk that the company will fail.

However, buying pre-IPO stock has never been easier if you’re willing to take on the risk and invest in early-stage companies.

Pro Tip: Ziggma’s stock analysis feature will help you understand your overall portfolio and what changes you need to make to improve your overall returns.

What are Pre-IPO Companies?

Investing in pre-IPO companies involves buying shares in private companies not available on a stock exchange like the NYSE or NASDAQ. Typically, pre-IPO investing has only been available to institutional investors, accredited investors (think hedge funds or venture capital), and company employees.

Over the past decade, investing in private companies has become increasingly popular. Private equity funds investing millions of dollars in early-stage companies have allowed them to stay private longer and grow even greater valuations before they actually file to go public.

How Do Companies Sell Pre-IPO Stock?

Before we discuss the best ways to buy pre-IPO stock, it’s important that we look into how companies can sell pre-IPO investments. Typically, it’s done in one of the following ways.

• Stock Options: Company employees can own company shares through stock options.
• Venture Capital Firms or Private Equity: These larger organizations provide early cash flow to help companies grow. The investing company is given an ownership stake based on the investment amount.
• Pre-IPO Placement: Before the IPO, certain investors may be able to purchase discounted shares from the IPO underwriter.

Benefits of Pre-IPO Investing

• Potential For High Returns: Investing in pre-IPO companies comes with many risks, but the reward can be significant, especially if the company is successful post-IPO.
• Access to Promising Companies: Investing in companies before their IPO gives you access to innovative business ideas before becoming available to the general public.
• Portfolio Diversification: When you buy pre-IPO stock, you add more diversification to your portfolio.
• Discounted Share Price: Investing in private companies gives you access to shares below the price they are expected to be during the IPO.

Disadvantages of Pre-IPO Investing

• Higher Risk of Failure: Investing in pre-IPO shares is risky because many startups will fail before becoming public companies.
• Low Liquidity: Unlike public companies with tens of thousands of shares traded daily, pre-IPO stocks have little volume. Investors must hold onto their shares for several years before cashing out.
• Uncertain Valuation: Understanding a company’s valuation in the pre-IPO market can be difficult. This can lead to overvaluation, reducing the potential return.
• Possible Lock-Up Periods: Investors in IPO stock occasionally face lock-up periods, during which they are required to hold onto their investment for some time after the IPO. 

How to Buy Pre-IPO Stock

There are a few ways you can invest in pre-IPO shares. Below, we discuss three of the most popular ways that investors use.

Purchase Shares on a Secondary Marketplace

One of the most common ways to buy pre-IPO stock is through a secondary marketplace. These platforms connect accredited investors with company employees and other early investors looking to sell their shares. A few of the more popular secondary marketplaces for these transactions include:

• Hiive
• EquityZen
• Forge Global

In addition to these marketplaces that specialize in pre-IPO investments, there are also a few brokers that also provide access to pre ipo investing, including TradeStation and Fidelity.

Invest in Pre-IPO Funds

Another way to invest in private stock before these companies go through an IPO is with a venture capital fund. These funds, which are investing millions of dollars in high-growth companies, give outside investors the chance to get involved. Some notable pre-IPO funds include:

Private Equity ETFs: These are a great way to access pre-IPO companies. Some of the largest funds include the ProShares Global Listed Private Equity ETF and Invesco Global Listed Private Equity ETF.

Public Venture Capital (VC) Firms: There are also select venture capital firms that will offer access to pre-IPO companies. Blackstone is one of the largest VC firms with holdings in companies like Ancestery.com, Bumble, and Hello Sunshine.

ARK Venture Fund: Another option is the Cathie Wood managed ARK Venture Fund, which has a stake in companies like OpenAI, SpaceX, and Epic Games.

Invest Indirectly

Another way to purchase an interest in a private company is through publicly traded companies that have an interest themselves. For example, you can’t buy shares in Hulu, but instead, you could purchase shares in Hulu’s parent company, Disney. Another example would be if you wanted to invest in Instagram. You could buy shares of Meta (Facebook), which owns Instagram.

How to Evaluate Pre-IPO Investments

Before investing in pre-IPO stock, it’s important to do your due diligence. However, the information available for a pre-IPO company will be significantly less than a publicly traded company. That’s because private companies aren’t required to disclose as much of their financials.

Because there isn’t much information available on pre-IPO companies, you need to ask yourself a few questions to understand the company better.

• How does the company generate revenue?
• What makes this company great?
• Who is the target market for the company, and is there significant market demand?
• Does the leadership team have experience scaling a business?
• What is the company’s competitive advantage?
• What are the market conditions in the companies industry? Could this have an impact on their growth potential?

Who Can Invest in Pre-IPO Stock?

If you want to purchase pre-IPO stock through a venture capital fund, then just about anyone is eligible. However, if you purchase pre-IPO investments through a secondary marketplace, you must be an accredited investor.

To become an accredited investor, you must meet any of the following criteria.

• Your individual income is at least $200,000, or your combined income with your spouse is at least $300,000.
• Your net worth is at least $1 million (excluding your primary residence).
• You are a qualifying financial professional, such as someone holding a Series 7 or Series 63 license.

The Bottom Line

Pre-IPO investing allows you to invest in high-growth companies before they decide to go public. While the potential for significant returns is high, these companies also have significant risks.

Before investing in a private company, it’s important to understand what the company does and how it differentiates itself from its competitors.