What to look for in a pre-IPO investment platform

Pre-public offering investing (pre-IPO investing) represents a high-risk, high-reward avenue for portfolio diversification, allowing investors to access innovating companies before they enter the public market. This market opens up significant opportunities for growth and profit beyond traditional markets. More and more, alternative investments like pre-IPO investing are seen as an essential part of a diversified portfolio. With a growing number of pre-IPO platforms available, what should investors consider when evaluating which platform is right for them?

This guide will equip you with the knowledge to choose the best-suited opportunities in the pre-IPO market and the platform that best meets your unique needs.

Experience Matters

The pre-IPO investment market is quite nascent. The first pre-IPO trades began around 2012 when Facebook was preparing to go public. Having said that, experience matters. That is because pre-IPO investment transactions are typically more complex than public market investments. They involve coordination across the buyer, seller, and the private company for various operational and legal work streams. An experienced pre-IPO investment platform may be better suited to navigate these intricacies, setting you up for a higher likelihood of investment success.

Because of this, it’s worth considering the number of years a pre-IPO platform has been around, the number of transactions they’ve completed, the number of private companies they’ve worked with, and their track record with regulators. It will help give you a sense of their expertise in the market. Furthermore, the longer a platform has been around, the more robust data they will likely have on market trends as well as bids, asks, and trades for specific private companies. EquityZen, for example, is able to leverage over 11 years of secondary market data from over 41,000 transactions¹ to help inform investors, shareholders and private companies who transact. Platforms with rich data like this can help investors make more informed investment decisions and better understand the market which has historically been opaque.

Not all Fees are Equivalent

Investors want to make sure they are paying a fair price when making an investment, which is why understanding fees is important. There are a variety of fees that a pre-IPO platform might charge and investors should understand the price net of fees that they will be paying for a given company’s pre-IPO stock when comparing different pre-IPO platforms. Here is a breakdown of the most common fee types.

One-time brokerage fee

Most pre-IPO platforms, including EquityZen, charge a one-time, upfront fee to buyers or sellers. This fee helps cover the operational costs of operating a broker-dealer and facilitating pre-IPO transactions. EquityZen’s fees range from 3 to 5% of the total amount invested with the fee being lowered as the investment size increases. Investors should be wary of platforms that charge exorbitant one-time fees and consider the net cost per share they will end up paying to purchase pre-IPO stock. 

Ongoing fees or carrying charges

Some pre-IPO platforms also charge ongoing fees. These can include an annual management fee, charged as a percentage of the total investment amount, or carried interest. With carried interest, an investor pays out a percent of their investment proceeds after a successful exit to the investment firm who facilitated the investment. 

These fees can increase the performance hurdle that an investment needs to clear in order to be profitable. EquityZen’s single-company investments do not charge any ongoing fees². 

“No Fee” Investments Likely Include Markups

There is no such thing as a free lunch, especially in the world of financial markets. Some pre-IPO platforms claim that they don’t charge fees, but instead add a markup to the price an investor pays for pre-IPO stock. An example would be where the platform buys stock for $10, but charges their clients $13 to buy that same stock, a 30% markup. A markup can end up making an investment more expensive than an upfront investment fee alone (e.g. a 5% fee on $10 means your net price is $10.50 per share, considerably cheaper than buying for $13 per share). For this reason, investors should look at the net price they would pay relative to price per share of the company’s last round of funding, to determine if they are paying a fair price. EquityZen recreates the capitalization table for each investment we offer to help investors understand the net price per share they are paying versus the company’s last round of funding³.

Layered fees

Some pre-IPO investments are structured as a special purpose vehicle (SPV) that invests into another SPV that owns the underlying shares. In this case, investors may end up paying fees to both investment vehicles, which can increase the net price potentially making the investment more expensive. Therefore, it’s important to understand the exact structure and the related fees of any investment offering. This should be clearly outlined in the investment’s offering document. EquityZen's offering documents clarify exactly what the investor is investing in, whether it is the shares directly, a direct fund that owns shares, or a fund that will make investments in other funds that will own shares.

Interested in browsing the private company investment opportunities available on EquityZen's marketplace?

Company Approval

Company approval is an important part of the pre-IPO investment process. It ensures that the company is on-board with the transaction and mitigates risk that shares are legally held by investors, especially once a company experiences an exit event like an acquisition or IPO. EquityZen gets company approval on each investment transaction that we facilitate for our investors. We believe that working closely with private companies to facilitate these transactions makes for a more scalable and stable market and have received approval for the 41,000 transactions we’ve conducted in nearly 500 private companies⁴. This company-friendly mentality has also provided us with unique access to investment opportunities for investors on our platform. Not all pre-IPO platforms seek company approval for the shares they offer, so this is an important detail to consider. 

Likelihood of Success

Ultimately, companies control who and how investors can buy shares. This means that not all attempts at purchasing shares will be approved. Most private companies have a Right of First Refusal (ROFR) under which they can choose to purchase the shares themselves instead of allowing a new investor to buy the shares. Unfortunately, this means that in some cases a pre-IPO investment may not be accessible for new investors⁵. 

EquityZen works to mitigate the risk of an unsuccessful investment in a few ways. First, a standard part of our due diligence process is making sure that the shares we offer our investors are actually transferable. Not all pre-IPO shares are transferable and we only want to offer investments that have a high likelihood of success. We also take into account a company’s history of blocking transactions and do not conduct transactions in companies where it is unlikely that the company will approve the transaction. For this reason, more than 90% of deals offered on EquityZen’s platform are successful⁶, far above the industry average. 

Breadth & types of offerings

Breadth of pre-IPO offerings

Every pre-IPO platform has a different frequency at which they offer new investment offerings. The chance of finding the pre-IPO company you want to invest in increases when a platform offers more deals, more frequently. EquityZen offers new investment opportunities every Tuesday and Thursday, often offering ten or more pre-IPO investments to choose from at any given time. By doing so, we hope to provide a wide range of vetted opportunities to meet the unique investment interests of each of our clients. 

In financial markets, a transaction happens when two parties agree on time, size, and price. In order to offer a wide range of investment opportunities at any given time, a pre-IPO platform needs a robust network within the private market. EquityZen’s network of over 660,000 shareholders and investors, coupled with our long-standing reputation in the market, provides us with differentiated deal flow that can lead to more investment opportunities for our investors, more frequently. 

Product types

There are a variety of different product structures through which an investor can access pre-IPO shares. In most cases, pre-IPO investment platforms offer access to invest via an SPV that holds shares of a single private company. Known as “Standard Deals” on EquityZen’s platform, this is our core product type. 

Some investors, and many first-time investors, are looking for diversified exposure to the pre-IPO market instead of investing in a single company. For these investors, a multi-company fund offering could be attractive. Fewer pre-IPO platforms offer multi-company funds so if this is your preferred investment structure, you’ll want to look for platforms that offer these funds. EquityZen has managed diversified multi-company funds for over 8 years. Each fund has a unique mandate and investments are chosen by our experienced investment committee. 

Interested in browsing the private company investment opportunities available on EquityZen's marketplace?

Liquidity 

Finally, most pre-IPO investment platforms expect investors to hold their pre-IPO investments until an exit event. While these investments should be considered long-term holdings, situations may arise where an investor needs liquidity pre-IPO. This is where products like EquityZen’s Express Deals can be beneficial. This product allows an existing EquityZen investor to sell their stake in a pre-IPO investment to another investor on EquityZen’s platform. While we can’t guarantee that there will be a buyer at the price a seller wants to sell at, this can help mitigate some of the risk by providing an avenue for shorter-term liquidity for investors looking to sell pre-IPO⁷. 

Investment minimums

Each pre-IPO platform offers different investment minimums, impacting who can invest. Some platforms require upwards of $100,000 to make a pre-IPO investment. EquityZen’s investment minimum of $10,000⁸ is among the lowest in the market, aligned with our goal of building private markets for the public. 

As of June 2024. Sourced from EquityZen data and publicly available information about other pre-IPO marketplaces.

What Is the Best Pre-IPO Investment Platform?

Pre-IPO investing can significantly enhance portfolio diversity and growth potential. While each platform offers unique features, it’s important to choose the one that best aligns with your investment profile and goals. 

At EquityZen we strive to be the leader in the pre-IPO market by providing some lowest investment minimums available, as well as expert guidance and market analysis backed by over a decade of leadership in the pre-IPO market. In doing so, we aim to simplify the entry into pre-IPO investing, making it more accessible and navigable, particularly for those new to the market.

Visit our Investor page today to learn more!

Interested in browsing the private company investment opportunities available on EquityZen's marketplace?

Disclaimers

1. EquityZen data, as of June 2024
2. EquityZen's multi-company funds do charge a "carry" fee where the fund manager keeps a percent of profits, to align incentives. These multi-company funds pass on any expense reimbursements to support ongoing fund management and administration (e.g. audit and annual tax reporting). 
3. A lack of publicly available and verifiable information can materially impact the accuracy of information provided, including without limitation, estimates relating to the valuation and capitalization of companies subject to investment.
4. EquityZen data, as of June 2024
5. Although shares may be legally transferable, companies may still block a transaction or exercise their right of first refusal to purchase the shares.
6. EquityZen “Standard Deals” for last 3 years as of June 2024
7. Express Deals may not be available for all investments and are subject to minimum investment sizes and holding periods.  Please see our FAQs for more information.
8. $10,000 minimum investment is available to first time investors but may not be available for all offerings.  Please see our FAQs for more information about investment minimums.