Primary vs. Secondary Investing in Private Companies

Investing in private technology companies, while not without risks, can lead to substantial financial gains. This is especially true as these companies grow and aim to go public. However, the investment process differs significantly from investing in publicly traded stocks.

Two main types of investments in private companies exist: primary investments and secondary investments. Understanding the distinction between the two can help investors determine their best path for accessing promising private companies.

Primary Investing: Direct Access in Private Companies

Primary investing occurs when an investor buys shares directly from a company, typically as part of a funding round. These private market investments often come through venture capital firms or other institutional investment vehicles. Some key aspects of primary investing include:

Early-stage investment: Investors participate in funding rounds, such as Series A or B. In doing so they directly provide capital to the company to drive future growth. Investing at an earlier stage has the potential to drive outsized returns if the company grows successfully. However, earlier stage investments come with more risk.
Higher capital requirements: Primary investing is the main way that private companies raise capital. Because of this, companies usually set high investment minimums, making primary investing less accessible to individual investors. Often, the minimum investment amount can be over $1 million.
Restricted access: Most primary funding rounds are limited to institutional investors and ultra high-net-worth individuals with significant financial resources, like angel investors or family offices. These investors often have a strong network within the technology and startup ecosystems to help them find investment opportunities.
Long-term commitment: Shares acquired in primary rounds can be illiquid. Investors typically must wait for a liquidity event, such as an IPO or acquisition, to realize returns. This timeline can be upwards of ten years. Luckily, platforms like EquityZen offer pre-IPO liquidity for primary investors in private companies.

While primary investing can drive strong returns, it can be difficult for individual investors to access these opportunities due to both exclusivity and higher investment minimums.

Secondary Investing: Buying Shares from Existing Shareholders

Secondary investing, on the other hand, involves purchasing shares from existing shareholders rather than directly from the company. In this way, it is similar to buying shares in a publicly traded company where you are also buying from existing shareholders. In the private markets, early employees or investors are typically the selling shareholders. As companies stay private longer, they may need liquidity before the company exits.

The need for pre-IPO liquidity is growing. Early employees may need cash to finance life needs like paying medical bills or putting a downpayment on a house. Meanwhile, early investors may need to return capital to their limited partners.

This is good news for private market investors. Growing needs for pre-IPO liquidity have enabled more private market investment opportunities. Because of this, secondaries have become a key way for individuals to buy private company shares. Here’s why secondary investing is appealing:

Easier access for individual investors: Secondary markets allow more investors to participate in private company investments versus primary markets. Individual accredited investors can invest without needing to access primary funding rounds via marketplaces like EquityZen. To qualify as an accredited investor, individuals typically need to have annual income of $200,000 in two of the last three years and a reasonable expectation of the same income level in the current year or assets greater than $1,000,000 excluding their primary residence.
Lower investment minimums: Secondary opportunities often have lower capital requirements, making them more accessible to a wider range of investors. EquityZen offers secondary investment opportunities in leading pre-IPO companies with investment minimums as low as $5,000.
Potentially quicker liquidity: Since secondary shares are typically available in later stage companies, investors may not have to wait as long to see returns. Most of the companies on EquityZen's platform have raised at least a Series C round of capital. These investments typically have a time horizon of two to seven years. This compares to the 10+ year timeline for earlier stage primary investments. However, it is important to note that a public market exit is not always guaranteed and liquidity in the private markets is less readily available than in the public markets.
Valuation insights: Secondary transactions provide valuable market-based price indications, offering more transparency on a company's worth between primary funding rounds. Investors can search a company on EquityZen to understand where shares are trading in the secondary market. This provides more real-time transparency on the company’s value over time. While these tools add to transparency, private market pricing still remains more opaque than public market pricing given the lack of intra-day marks and less publicly available information.

Private market secondaries can be appealing for some investors. However, it’s important to note potential risks like less liquidity and opaque pricing when compared to public market investing.

How EquityZen Provides Access to Secondary Investing

For individual investors interested in high-growth private technology companies, EquityZen offers a way to participate in secondary investing with lower investment minimums. EquityZen’s platform connects investors with shareholders looking to sell their private company shares. In doing so, we offer a unique opportunity to gain exposure to high-potential startups before they go public.

Key benefits of using EquityZen include:

Lower entry barriers: Accredited Investors can participate with investment minimums significantly lower than traditional venture capital requirements. The minimum investment size for many of EquityZen’s offerings is $5,000.
Diverse* investment opportunities: EquityZen’s marketplace features a range of late-stage private technology companies. Our focus is on companies with strong growth prospects in industries ranging from AI to fintech to green energy. New deals go live each Tuesday and Thursday.
Streamlined transactions: EquityZen streamlines the process of buying and selling private company shares. We handle all the approvals necessary on behalf of our investor and shareholder clients with expertise from completing over 45,000 secondary transactions.

Primary investing remains popular amongst venture capital firms and institutional investors. However, secondary investing has created new opportunities for individual investors to access private technology companies that are shaping the future. Platforms like EquityZen make it easier for buyers and sellers to participate in the secondary market, offering a gateway to high-growth investments with lower minimums and increased flexibility.

If you are an investor looking to diversify your portfolio with private company shares, consider secondary investing. It can be a smart way to invest in innovative technology companies before they hit the stock market.

Not all pre-IPO companies will go public or be acquired, and not all IPOs or acquisitions are or will become successful investments. There are inherent risks in pre-IPO investments, including the risk of loss of the entire investment, illiquidity, and fluctuations in value and returns. Investors must be able to afford the loss of their entire investment.

*Diversification does not assure a profit or protect against market loss.