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Jeffrey Van Siclen
Certified Financial Planner

Jeff guides clients through complex financial challenges with a personalized approach.  He offers a wide range of services, including financial planning, tax optimization, portfolio management, and insurance. Jeff also specializes in areas like company benefit planning and 10b5-1 plans, ensuring his clients have a comprehensive financial strategy.

Jeff Van Siclen, CFP®

What Is a Pre-IPO Stock & Why Should You Invest?

June 7, 2024

As a professional in the BioTech, Life Sciences and Pharma industries, you are probably on the lookout for financial tools that can help you offset the uncertainty of your industry. A combination of good investments, insurance and other tactics can help you devise an overall strategy for wealth protection and growth. There are many different kinds of investments that you may want to consider, but in this article, let’s focus on pre-IPO stock options. As experienced financial advisors to professionals in your industry, we recommend that you seek out good pre-IPO stocks to include in your portfolio.

How Do Pre-IPO Stock Options Work?

A pre-IPO stock is a share in a private company that has not yet taken its stock into the public realm. Individuals can access exclusive, fast-growth companies before they do their initial public offering (IPO), and their shares become heavily traded on the financial markets. In this way, an investor has the opportunity to buy stocks at a lower price, in the hope that their value will increase dramatically once the company goes public.

If you, as an investor, buy stock in a pre-IPO company, you will hold a certain number of shares that, for the time being, are fairly illiquid and low in price. If the company should then file for an IPO, you will then hold liquid public stock listed to trade openly, and hopefully in high enough demand to generate good returns.

In order to make pre-IPO investing work for you, you need to choose carefully. Select a company that looks set to be the next success story in tech or other high-growth industries.

Pre-IPO Investment Opportunities

Finding pre-IPO investment opportunities can be tricky because you won’t find these stocks offered on public stock exchanges. You would either have to know someone who has their finger on the pulse of your target industry or work through a market platform, where you can invest in pre-IPO stocks through secondary investment tools. If you work with a wealth advisor at LRVS Advisory Group, you can trust us to identify the best pre-IPO investment options and steer your investment decisions accordingly.

Benefits of Buying Pre-IPO Shares

Buying pre-IPO shares unlocks several potential benefits, including:

  • A chance to diversify your portfolio: Diversification is an important attribute of any investment strategy. You should always spread your financial risk across several stocks and sectors. Pre-IPO investing is one way to help you achieve this.
  • Exclusive opportunities: You get access to exciting and innovative new companies before anyone else has a chance to access their stock. You can invest in potentially groundbreaking ideas, technologies, and companies before the general public is even aware of them. You can then enjoy the benefits if the company is successful.
  • Access to substantial gains: Since you would be investing in a company long before its stock becomes valuable, you have the opportunity to realize excellent gains once the company starts growing.

That being said, you should also be aware of the risks that come with pre-IPO investing. They include:

  • Liquidity risk – at least in the short term. You will need to hold onto your shares for a long time – up to seven years or more – before they become more liquid and you can start realizing the gains.
  • Possibility of failure. The startup you choose to invest in may not amount to anything. This is why it is so vital to be selective and seek professional financial advice.
  • Lack of transparency. Additionally, because private companies are not obliged to share their information, investors are not necessarily able to get a good view of the possible risks and returns.

Managing Pre-IPO Investing Risks

To offset the risks of pre-IPO investing, we recommend the following measures:

  • Choose carefully and do your due diligence before spending any money. There is a potential lack of transparency to consider, and it is not always easy to tell which startup is going to explode and which one might simply collapse. Do your own homework and mobilize professionals to do some investigating for you. An LRVS family CFO is in an excellent position to help you choose the best pre-IPO options.
  • Diversify! Spreading your risk is absolutely essential. If you choose to invest in pre-IPO businesses, don’t put all your money in one place. Make sure you have safe investments elsewhere to offset any losses you may experience.
  • Use your liquidity needs as an investing guideline. If you need access to your money quickly, then pre-IPO investing is not a good choice. Assess your liquidity needs and invest in pre-IPO stock only if you are prepared to wait a few years before seeing any returns.

Pre-IPO Requirements for Investors

Pre-IPO investing is usually available to private investors only through secondary marketplaces. While new regulations are making direct investment more feasible, you typically need to be an accredited investor – or work with one – in order to invest in growth-stage companies.

The Securities and Exchange Commission (SEC) enforces a number of criteria that one has to meet when it comes to pre-IPO investing, most of them relating to net worth and income thresholds. Your LRVS Family CFO will discuss the various requirements with you, and ensure that you fulfill them, should you choose to invest in pre-IPO stocks. If this is an investment option you would like to consider, consult with one of us today.

*Disclaimer:

This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

This article is the sole opinion of this individual and is not indicative of the firm’s beliefs.