Buying stock pre-IPO involves investing in a company before it is ready to issue an initial public offering -- usually when the company is in startup phase. There are five ways to own stock pre-IPO. The first is to start your own company or become part of the founder group of a company. You can also be part of the friends-and-family group of seed investors. Another way is to invest, as an individual, in a local company you find on your own or through recommendation by an attorney, accountant or banker. The forth way is to join an angel investment group. The fifth way is to invest in a hedge-fund, venture capital fund or mutual fund that invests in startup companies.
Take some college-level finance and investment courses, particularly those covering analysis of financial statements, business startups, marketing, corporate finance and industry analysis. Investing in a pre-IPO company requires considerable sophistication if you are going to avoid losing your money. Approximately half of all new businesses fail before their fifth year.
Prepare your own statement of financial resources. Most private placements and investment groups require you to be an accredited investor. An accredited investor has a net-worth of $1 million or more or reliably makes at least $200,000 annually or $300,000 in combination with a spouse.
Check out angel investor groups in your area. You can find a directory of these groups on the Angel Capital Association website along with other angel investor resources. Some of these groups may allow you to participate in a limited way if you are not an accredited investor, but ask first.
Contact attorneys, accountants and bankers in your area to see if they can recommend a startup company that is looking for investment. They can also recommend venture forums or showcases, business incubators and entrepreneur networking groups where you can meet entrepreneurs seeking money.
Attend as many venture forums, entrepreneur networking events and visit as many business incubators as you can. The key to success is seeing as many startup companies as possible. In other words, you want to see a lot of deal flow.
- Organizations such as the Small Business Administration (SBA) and the Service Corps of Retired Executives (SCORE) are also excellent resources for information on how to be a successful startup investor and where to find good companies that are seeking investors. These organizations will also have information on Regulation D offerings (called Reg. D) or private placements, which are offered through Private Placement Memorandums (called PPMs).
- Never invest without full legal protection. This means you should have an attorney either prepare your term sheet and investment contract, or invest only in deals using a PPM. Have your attorney review the PPM, or learn to analyze them yourself. Never make just a friendly investment without knowing exactly how many shares you will receive and when, and demand this information in writing.