How Can I Invest in Pre-IPO Stocks? Exploring EquityZen's platform giving investors early access to growing companies.
EquityZen - Pre-IPO Stocks
EquityZen is a relatively new company opening pre-IPO stocks to a larger market. They’ve built a marketplace for owners of stock in private companies who are interested in selling all or some portion of their shares. Private equity has long been an arena for wealthy investors, private funds and corporate investors. EquityZen is opening this market to more private investors, like me.
In this post, I cover the website, features for investors, investing process, my experience so far, and provide links to get started selling shares or investing through EquityZen.
EquityZen’s platform is built to connect shareholders with buyers, or investors. Serving the shareholders is important, but my blog is geared toward investors. Therefore, I’ll focus on the features available in the investor section.
EquityZen Investor Account
I’ve been researching pre-IPO stocks for several years. Unfortunately, I’ve never pulled the trigger on investing. That’s, primarily, because of the significant capital investment in very long-term position. After the recent volatility in the market and uncertainty in the debt markets, the pre-IPO stock market is more attractive. This kind of investing is more of a set it and forget it type.
To start, let’s look at the investment opportunities listed on EquityZen. You can filter by “available”, “preview” or all. “Available” is for active listings, while “preview” is for listings they expect or hope to list soon.
To view specifics about any offering, just click on the “Invest Now” text by the listing. In this case, I selected InVisionApp. I’m familiar with their platform and interested the industry, so investing makes sense.
Once you are on the listing page, there are several sections that breakdown the investment opportunity. The screenshot above shows a quick overview of the InVisionApp opportunity. Here, you can review the type of listing, price, fees and more.
Start Pre-IPO investing
Because InVisionApp is my 1st pre-IPO stock investment, EquityZen has lowered the minimum investment to $10,000. That makes the risk a little easier to accept as I dip my toe into private equity investing.
After selecting a listing, you’ll be directed to the reservation page. On this page, you’ll enter or change your investment amount and enter your personal information. Note that the investment does not close immediately. EquityZen accepts your commitment to invest and waits until enough other investors have committed in order to move forward with closing their fund. As you can see, they expect this process to take up to 2 months.
Continuing on, you’ll be directed to the Term Sheet. This is a standard legal document in private investing. Whether you’re investing in a startup or an established company with several funding rounds, you should expect to submit a term sheet as part of the process. This sheet outlines the buyer, seller, amount invested, price and so on. One of the most important part of this sheet, is the “aggregate commitment.” I’ll discuss this more below.
In this screenshot, I’ve captured some of the most important parts of the term sheet. I will be purchasing shares at $15.17 excluding EquityZen’s sales fee of $500. After the fee, my total cost is $10,512.81. You may have noticed that the investment is slightly above $10,000. That’s simply to make the math work for round numbers. After the transaction closes, I’ll receive the equivalent of 660 shares of InVisionApp or .307% of the value of the fund.
Pre-IPO Stock Buying Process - What am I buying?
To be clear, I am not buying InVisionApp stock. I am, in fact, buying 0.307% of EquityZen Growth Technology Fund LLC – Series 650. This is a legal entity established by EquityZen to hold the stock of InVisionApp or whatever the company may be. The image here is a quick screenshot after a search on the Delaware Division of Corporations website. It’s a common practice to form these entities in Delaware. Importantly, the distinction as to what company I’m investing is has several implications.
- I am not an owner of InVisionApp, directly. I have no right to vote on company matters or interact with management in any way.
- I have no legal recourse against InVisionApp. While unlikely, in the event of fraud or misuse of investor funds, I cannot file a lawsuit as a shareholder. I would have to rely on EquityZen to file or join a civil suit against InVisionApp.
- I will receive, and need to file, a K-1 from EquityZen for my annual taxes. This should show no income until the fund is liquidated upon the sell of the InVisionApp stock.
As with any investment, it is important to understand the underlying financial situation of the company you are investing with or through. You’ll see a snap shot like this on my blogs, if I can find the info.
Safe to say, the information available on the SEC’s website is sparse. The listing for EquityZen Inc has almost no filings. EquityZen Securities, a subsidiary of EquityZen Inc, has a few more submissions, but these financials are the most recent I could find.
While there is no revenue, expenses, or income information available, the overview does provide some insight into the company’s operations. They have almost $2Min cash on hand. Of which, $1.2M is in excess of accounts payable – or free for company use. This is not a large sum, but it’s enough to keep the lights on and continue operations. Most importantly, they have a continuity plan in place in case they are forced to cease operations.
Let’s be clear, pre-IPO stocks are extremely risky. Experienced, professional private equity investors expect 90% of their investments to lose all or some of their investment. They are banking on that 10% paying off well enough to cover the other loses. Even late-stage, established companies may fail – think Theranos.
Besides this corporate risk, there is the added risk from EquityZen including fraud, misrepresentations, errors or mistakes. As an investor, I am taking a leap of faith that EquityZen is delivering the shares they promise.
Do Your Homework
My blog is a great place to start, but I encourage you to conduct thorough due diligence prior to investing through EquityZen. Research the target company as well as EquityZen itself. To help you get started, I provided the links below to connect you to the Delaware Division of Corporations website, the SEC and CFPB.
Join me on EquityZen
Interested in joining me on EquityZen? That’s great! The links below will get you started if you want to sell shares or invest through the website.
As discussed above, EquityZen is a unique investment option outside the mainstream. I’m looking forward to investing along side you. The link above will get you started.
While I don’t cover the seller side of EquityZen in this post, it’s obviously an important part of the process allowing me to invest in pre-IPO companies. If you’re interested in selling shares, click the link above to get started. Hopefully, I’ll be able purchase your shares..
The statements in this post are my opinion and reflect my personal experience investing thru EquityZen. I cannot, and do not, guarantee that your results will be similar. Please, invest carefully and understand that your investment may lose value.