Overview
Tech giants are staying private longer. In a recent study conducted by Morningstar, the most successful private companies are taking an average of 11 years before going public, compared to 7 years a decade ago. For retail investors, this means that it is very difficult, if not impossible, to gain access to some of the most attractive investment opportunities available. P2P Shares’ pre-IPO marketplace was created to change this dynamic.
Buying pre-IPO shares is different from buying publicly-traded securities on the NYSE or Nasdaq. There is less available public info, you’re competing with institutions for access and transactions take more time to close. This guide helps you navigate the complexity of private share investing.
Timelines
In most cases, it takes approximately 30-45 days to complete a pre-IPO transaction after a seller and buyer match on a marketplace. The primary reason for this is navigating the ROFR (right of first refusal) process which gives the issuer the ability to purchase the shares.
An increasingly popular alternative to buying the shares directly from an seller is to invest through a Special Purpose Vehicle (SPV). Investing in these single issuer funds can simplify and speed up the process significantly.
When choosing to purchase equity through a P2P Fund, investors generally do not need to worry about a ROFR affecting the transaction, as that consideration has already been resolved as part of the fund agreement.
Selling Fees
P2P Shares is not a brokerage firm like other pre-IPO marketplaces. We do not charge a variable transaction commission. Rather, we charge a small fixed technology escrow fee ranging from 0.25%-0.50% to the buyer and seller. This represents a 90% savings compared to the 2%-5% commissions charged by broker-dealer marketplaces.
Investment Minimums
Minimum investment amounts can vary based on the type and size of a transaction, among other potential factors. In many cases, a single-issuer P2P Fund offering may accept investments as low as $5,000. For direct investments, a company may require higher minimums, typically starting at $100,000, in order to approve the addition of a new investor to their capitalization (cap) table.
Buying private company shares: A step-by-step guide
Step 1: Requirements to buy pre-IPOs
You must be an accredited investor to buy private company shares. To qualify as an “accredited investor” as defined by the SEC, you must satisfy one of the following:
Net Worth Threshold
Your individual net worth, or joint net worth with your spouse or spousal equivalent, exceeds $1,000,000 (excluding the value of your primary residence).
Annual Income Threshold
Your individual gross income exceeded $200,000 (or $300,000 jointly with you spouse or spousal equivalent) in each of the two most recent calendar years, and you expect the same in the current year
Professional Sophistication
You hold an active financial credential in good standing (e.g., Series 7, 65, or 82 license) that automatically designates you as an accredited investor by sophistication.
If you are an accredited investor, It’s free to sign up on P2P Shares and to access the marketplace. We only charge a fee when the buyer and seller match and enter escrow.
Step 2: Research private companies on the P2P marketplace
After you’ve successfully registered and completed the onboarding steps, you’ll have access to a wealth of data available on the marketplace. You’ll find information on thousands of pre-IPO companies across a broad range of sectors and industries
P2P Shares offers in-depth information and data for you to review, including details on latest funding rounds, valuations and industry insights. When conducting research, you have several options to filter companies that interest you. You can sort by most active companies, those with the most liquidity, and those with planned upcoming IPOs.
You will see all the P2P funds available. If you choose to invest through a P2P fund, you may be able to complete your transaction more quickly than with an individual seller and also will have the potential for greater liquidity to sell in the future.
Step 3: Submitting a Bid
Once you’ve identified a company that you wish to invest in, you’ll need to determine the price per share you want to pay. Like all transactions, buyers and sellers of private shares need to agree on a price to proceed. Again, unlike the public market, which often offers near-instant prices on securities, pricing of pre-IPO company shares is more complex and less transparent than that of publicly traded stocks and exchange-traded funds (ETFs). P2P Shares offers a broad range of data to help you determine the price you’re willing to pay.
In addition to referencing Forge Price, here are several other questions to consider:
- What is the lowest current asking price?
- What is the discount or premium from the company’s last funding round or other liquidity event like a company-sponsored tender offer?
- Based on recent transactions, is the company’s price moving upward, downward or staying relatively flat?
- What is the last-matched price for a closed transaction?
- How often has a company’s shares traded recently?
Step 4: Determine if you want to accept or negotiate an existing offer
Once you’ve completed your research and identified a company you’d like to invest in, you can choose your preferred price and quantity by submitting a bid, a non-binding offer to purchase shares. At this point, you’ll see a few different options available depending on the company and current market activity.
You can take one of two actions:
Option 1: Accept a seller’s offer or negotiating terms
You can engage with any active listing in the marketplace. If the listed terms (price and quantity) work for you, you may accept the offer and move forward with the transaction.
Option 2: Contact the seller and negotiate terms
You have the option to propose alternate terms (e.g., a lower price or different quantity), initiating a negotiation with the seller.
Tips on negotiating:
When negotiating with a seller, it’s important to understand the concept of bid-ask spread. In some circumstances, particularly when markets are volatile, the bid-ask spread might widen, indicating that there’s disagreement about what price a company’s shares should sell at. But if the bid-ask spreads are tight, that is an indication that buyers and sellers are in greater alignment, which might result in more liquidity.
In the public market, bid-ask spreads can be as low as several cents, or even less, due to the broad amount of information available for most public securities, as well as the level of demand and broad accessibility by investors. However, private market bid-ask spreads can be several percentage points. The size of the transaction can also affect the spread, as a seller may be willing to accept a lower price for a larger quantity of shares.
Option 3: Submit a new bid
Enter your desired price and quantity. This bid will be visible to sellers, who may choose to accept or counter your terms.
P2P Shares displays real-time pricing, available quantities and other transaction details, helping you evaluate the market and act confidently.
Step 5: Finalize trading terms and sign transaction documents
Once you and the seller have agreed on a final price and quantity, the trade is “accepted,” and escrow can be opened and documents are delivered to you and the seller for signatures.
Step 6: P2P Shares submits the right of first refusal (ROFR).
After the escrow is open and you have sent funds, process generally takes 45 calendar days for the ROFR and successful closing
Direct purchase
In most cases when attempting to buy shares directly from a shareholder, the company will have the ability to exercise a right of first refusal (ROFR). This means that the company has the right to purchase shares directly from the seller at the price you set. In most situations, the company has between 30 and 45 business days to exercise their ROFR, though terms may vary significantly between individual companies and some companies respond more quickly to ROFR requests than others.
Why would a company choose to exercise its ROFR?
A company may deem the potential transaction price as too low, they may not want to add external investors to their cap table or they may have other reasons. In some cases, an existing stockholder may also have a ROFR in addition to the company. Either way, the ROFR process must be completed before a trade can be finalized. If a company or stockholder exercises their ROFR, then your transaction may not proceed.
If this occurs, you can start again by pursuing another company’s shares. Or, if you still want to purchase equity in the original company, you may be able to pursue a transaction via a P2P fund for the company’s shares.
The ROFR is typically not applicable for fund offering purchases
If you are buying shares via a SPV, the ROFR process in most cases has already been resolved as part of a broader agreement between the company and P2P Shares. For funds and other pooled vehicles, there will likely be other considerations, so it’s important to understand the terms and conditions outlined in the fund agreement.
Step 7: Close escrow
Once all the steps ,including the ROFR, have been completed, the transaction can be finalized.
When you close escrow on a direct purchase you are the owner of the actual shares. Depending on the company, proof of ownership may be held in a third-party-equity management partner, such as Carta or Shareworks, which are online platforms that help companies, employees, and investors manage equity ownership stakes, including a company’s cap table. In some cases, your proof of ownership will be available through these platforms. We will provide your ownership documents to you after your escrow closes
Single-issuer SPV purchase: If you purchased equity through a fund offering, instead of direct ownership, you own fund units, which offer a one-to-one exchange rate with company shares. In this case, your proof of ownership will be the fund documents provided at the closing of the transaction since the fund will appear as the owner of the shares underlying your units on the company cap table.
Key points to remember
Transacting in pre-IPO company shares has the potential for fantastic returns over time, though the process is not nearly as simple as trading publicly listed stocks or ETFs. P2P Shares makes the market for private companies more liquid and accessible, as well as saving money for both sellers and buyers of private company shares.