Investing in a company before it trades publicly on the open markets can sometimes be extremely lucrative if you pick the right company. Just imagine how wealthy you would be had you invested in companies like Google or Facebook when they were private startups. Although this is not as easy as buying stock in a publicly traded company, there are several ways you can buy stock in a private company.
Consider investing money with a friend or family member. Most startups get their first funding from friends and family of the entrepreneur. A good way to find these seed-stage ventures is through a local business attorney, accountant or banker. If you are a friend or family member, you will not have to qualify as an accredited investor.
Participate in a Regulation D private placement. These offerings are made with a private placement memorandum, investor questionnaire and subscription agreement. They are available to accredited investors, and a small number of sophisticated, though not accredited, investors. Attorneys, accountants and bankers are a good source of information on these private offerings.
Join an angel investment group. You will have to be an accredited investor to participate, but by attending some of their meetings, you can develop venture capital contacts. You might be able to learn from them where to find good startup company investments.
Call the investor relations manager at the company you are considering investing in. Most private companies that have funded themselves by PPM have some shareholders who want to sell their stock. The company can't sell you these shares, but can put you in touch with the shareholders who want to sell. In a secondary sale between private individuals, you do not have to be an accredited investor.
Ask the investor relations manager if the company is selling treasury stock. Sometimes a company will sell stock directly to investors because it needs to fund a cash shortfall. In this case, you must be an accredited investor and fill out the investor questionnaire and subscription agreement.
Check out an online marketplace for trading private placements, such as SharesPost or SecondMarket. You must be an accredited investor to participate in these services, but if you are, there are good opportunities to purchase pre-IPO shares.
- An accredited investor is an individual who has a net worth of $1 million or more, or has reliable annual income of $200,000 or $300,000 if investing as a couple. The SEC sets these requirements in an attempt to assure that people who are investing in private placements are sophisticated enough to understand the risks or wealthy enough to afford the potential losses.
- Not every private company goes public at a premium price, and not every private company goes public. Some want to go public and will tell you that is their intention, but either don't have the money to spend on audits, attorneys and investment bankers, or they have some internal problem that must be solved before they can qualify to go public.
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