Pre-IPO is part of "private market" investing — as opposed to "public market" investing, the kind you're probably already used to hearing about.
When I first heard of them, private markets sounded … scary? Like the sort of market you'd come across in the back of a dark alley… with a dealer in a large overcoat selling you "unregulated securities" shudder.
However, having already made several investments in private companies, I've got a much better idea of how they work (and no, they don't involve dark alleys).
That's what this post is all about.
How is private investing different?
The sort of market most of us are familiar with is the public stock market. There are a few key differences that make private investing different:
- There's (much!) less information to assess
- Very little liquidity: don't think of it as a short or long-term investment, but a forced-term one :]
- Doesn't fluctuate, because, well … see #2
- Harder to get access to (ridiculously high minimums!)
So why invest in private markets?
You might have read the last section and thought: why on Earth would anyone want to invest in the private markets with all those risks?
There's just one answer to that, friend: upside.
Private investing is the land of the elusive 10 baggers — even the often rumored about, but rarely sighted, 100 baggers.
And with more and more companies staying private for longer, it's where many people with extra dough have turned to when deploying their cash.
Take Stripe. When this $100bn behemoth eventually goes public, it'll hit the Top 10 of the S&P500 that very moment.
There are a few companies I have in mind that I would love to get access to, just because of the quality of the products they build and the sheer tenacity of the founders. Companies like
Stripe (nevermind, they introduced Stripe Capital which deals with interest), Front, Flexport and Airbnb (nevermind, they're public now!).
Private investing is NOT for everyone
Before we dive too deep into this topic, let's be clear: private investing is not for everyone.
I don't just mean that figuratively, like from a risk-appetite standpoint.
You need to be an "accredited investor" to invest in private companies. Essentially, that means you need to have income of more than $200k/yr or have a net worth of at least $1m.1
That said, I've found that almost all the platforms I've encountered only require that you self-certify. (i.e. they don't ask you to upload any proof / source of funds). Take that for what it's worth.
Some people may feel like it's unfair that the rich have exclusive access to certain investments — and that they want to get in on the action too. To them I say: ok? I mean, there are much worse things that you can do with your money than private market investing. If you understand the risks and are OK with it, you do you.
Anyway, enough with the hypotheticals, let's make this real. Time to hear the story of a company I bought over the private market, that went public a few short months later (crazy, I know!). I'll share the costs, returns and the entire experience with you.
Let's dive in.
My experience: Buying $DOCN before IPO
I'd been using DigitalOcean since 2013, and I liked it. They were easier to use than AWS (still are!) and had carved themselves a nice little niche among smaller teams on the back of this.
When I stumbled onto the opportunity to buy their stock before the IPO, my ears perked. I had to look into it!
Thus began my journey into private market investing.
How it all happened
To buy shares before a company IPOs, you need to find someone who (a) has the shares and (b) wants to sell them to you. In a public market, that's easy to do — there are exchanges where the actual, well, exchange takes place.
In private markets, there's a few ways this exchange can happen. It could be through employees working at a company that have stock they want to sell. Or maybe it's early investors that want to liquidate some of their holdings. Sometimes, you can even buy shares from the company itself sells shares through what's known as a "secondary offering".
Buying private $DOCN stock
When I first began, I google'd pre IPO stock platforms and signed up for all sorts of websites — even some really dank, shady ones I probably woudn't have actually used anyway.
Of all of them, here are the ones that stood out as being the most reputable:
Actually, I think I left out the biggest platform for pre-IPO investing. It's called the Nasdaq Private Market — but alas, it seems like they're so big, they don't even want my money! I reached out several times and still don't have account there. A private, private market. Go figure…
Fact is, there are plenty of other smaller providers out there. I haven't tried them all, but you may find deals there that you won't get through other providers.
In my case, I found DigitalOcean first on EquityZen.
The terms looked like this2:
- Price: $25.00/share
- Fees: $1.25/share
- Implied valuation: $2.8B
- Minimum buy: $50,000 (!)
Take a moment to let that minimum buy number sink in.
It can be tough diversifying when a pre-IPO slice is larger than your whole portfolio!
It's even worse if you try buying on Forge. Their minimum is $100,000 — I once checked on Stripe stock and found the minimum buy there to be a cool $1,000,000!
I dragged my shaky hands over the trackpad, completed the form and clicked "Proceed".
Wait a second, how do you know the company is good?
As a man who likes digging through the fundamentals of a company, I was .. underwhelmed. I mean, really underwhelmed! I was hoping to see some financials: Income statement, cash flows — a balance sheet maybe?
No friend, nothing!
You'd be lucky if you came across a complete list of past investors. Some providers share data that they get through 3rd parties (usually PitchBook data) through mostly public, but sometimes private sources. Needless to say, accuracy isn't guaranteed.
Thing is, you need this information to determine if an investment is halal or not. The saving grace is that it's not that often that you come across companies with large amounts of debt pre-IPO (rarer still when they're software companies).
I don't have a whole lot of advice to give here other than to suggest checking the list of past investment rounds for venture debt. I avoid companies that have raised money via debt, and companies in industries that tend to be capital intensive (e.g. construction, real-estate, etc).
I wish I had more to share — but that's it. There's just no way to get this information without having direct ties to the company, or investors with "information rights". (If you know how, email me
There are several times where I came across what looked like really compelling opportunities, but that came with signs of reliance on debt. In such situations, it's best to steer clear. For example, I saw the opportunity to invest in Boom but passed on it because of what I was certain would be a long, debt-ridden journey for them.
Considerations before buying
There's an important part of private market investing that many people overlook — but is oh so important.
You have to consider: Will this company ever go public?
The tricky bit is: there's really no way to know for certain!
But there are some tells to lookout for:
Senior management shuffles, often involving the appointment of a CFO that's taken a company public
Review the investor roster; they tend to indicate likelihood of an exit (e.g. Softbank, YC Longevity, etc)
Buying the shares
EquityZen has a bunch of offerings open at any one time, but you can also indicate your interest in a company — and they'll let you know if they ever end up opening an investment opportunity.
Once you get the notification, you have to be quick! These things disappear like hot cakes — I was able to grab a slice in the first 5 minutes of the offering. I checked back in 10 minutes, and it was all gone!
This is not the time to be fumbling about with your phone keyboard. If you're looking to get into a hot company, make sure you're prepared before the window starts.
What happens next
You're not in the clear yet, The company (and it's investors) often have a Right of First Refusal clause that gives them the right to buy up the shares instead.
Never had this happen to me, so probably not something you need to worry too much about.
After that, you just wait.
There's a few ways the company can 'exit':
- It files for an IPO (i.e. it "goes public")
- The company gets acquired
I've had experience in both those cases; I'll walk you through what's happened in either case.
When the company files for an IPO
I was incredibly fortunate to have had the company file for IPO just 3 months after I bought it!
You wait for the lockup period to end, which can vary but is usually 6 months. You then do an ACATS transfer and receive the stocks in your brokerage account of choice — with the cost basis properly reflecting your cost.
This is what happened in the case of DigitalOcean. It went ... pretty well! That $50k investment, by the time I sold all of it, was worth ~$120k. A $70k return over a 9 month period, not bad!
Now, I don't think this case is representative by any stretch — but high quality companies do tend to "pop" on IPO, and in the case of DOCN, well after the lockup too!
When the company gets acquired
This is not something that happened through Equityzen, but through Angellist. That's the other part to this; there's a wide spectrum of pre-IPO investing, from the seed stage all the way up to mega-companies in the 10s of billions of dollars.
I've only had one exit via AngelList, where company was acquired by John Deere. Ended up making 7X my initial investment, but that was just $1,000 :) That's the issue with investing in earlier stage companies; it's a portfolio game, and you can't risk investing too much in a single company because — well, it might just go poof.
With later stage companies, you have a very decent track record to look back at — and in most cases, founder-led companies that exhibit high growth will continue to do so into the public markets. The risks are substantially lower in the going-out-of-business department, only to be replaced by the risk of the company never going public (or distributing a dividend).
It's clear that the appetite for IPOs has dropped, with many companies that have since IPO'd not faring all that well. Still, high quality seem to continue to pop — no matter the state of the market. If you find one, the advice to jump in regardless of price (which you wouldn't be able to accurately guage anyway, as a private investor) may turn out to be not so bad after all.
I'll push more updates to this post once I have a few more exits under my belt to give you a better idea of how average performance is like over time.
- The long-form definition: An accredited investor is defined in Regulation D of the Securities Act of 1933, and in the case of an individual investor, includes anyone who: (a) Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or (b) Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).↩
- I'd have shared a screenshot, but it's against their Terms of Service↩