Private securities (Pre IPO shares)

[Spekulatius]

Has anyone dabbled in private securities - pre IPO shares? If so, how did they go about it? I signed up at. A platform - sharepost just to get a feel for what is going on.

 

The process seems to be archaic, with a broker looking for shares to buy if you make an offer. There are no financials either, the only thing known are the financing rounds so far. Main bid size 100k usually, which is too steep for me

 

I would be interested hearing if somebody else went down this path further and has some experience with this.

[Gregmal]

Yea Ive done a few and know people who run these type of shops. Its basically the same thing wherever and theres a lot of places that do it with some, like Sharepost, InvestX, EquityZen the most recognizable and then a lot of smaller ones which hire teams of aggressive sales people who basically seek out folks at the target companies. This is something you can do yourself however where it gets really expensive is with all the legal stuff as most private share offerings have ROFR at the company level and paying a securities lawyer to draw up an agreement for you and the counter party just isn't worth it unless you're probably dropping a quarter mil or more. So thats where these companies come in. They basically take care of all the legal work and then you buy shares in a fund who's sole holding is typically your target company to get around all the issues involving registering shareholders and documenting multiple changes upon transfer. When there is a liquidity event, you can either request a cash out or have the shares transferred to an existing brokerage account. Its all pretty simple. The minimums at most is $20k or so. The sales charges vary a bit depending upon what you are looking for and how aggressively you want it. For instance Synthego I really wanted a few years back and paid almost 15% for commission for. Whereas Palantir these places where begging people to take, and was only 5%. Ive only got a handful because one, they are definitely illiquid. Expect like a 40-50% haircut if you need to cash out before a takeout or an IPO. And two. most of them are junk. I really just try to find unicorns or companies in areas I really wish to invest(like biotech) and then sit on my hands and wait or put out an indication of interest and see what/if anything comes back. Sometimes you'll get insane offers like for Ripple theres been shares offered anywhere between a $2B valuation and a $15B valuation. Definitely very buyer beware. I think if you can float a few low 5 figure investment and choose wisely, you'll be fine and its a neat little way to speculate on otherwise good companies. Would you have taken SNOW at the initial IPO offer? Or AirBNB at $30B? How about SpaceX? You're giving yourself a pretty damn good head start if you can get in on these. Even PLTR which I wasnt thrilled with up until a few weeks ago, $7.90 a share...RobinHood has been readily available the past few weeks, which is interesting given the IPO speculation. I wouldn't go fucking with small no name software or green new deal type stuff though. You dont get access to the numbers but there's other places like Pitchbook that have them and if you know a few folks in the biz theres other avenues to pursue as well. Frankly, I think some of its as easy as just finding a well established company, tracking its past funding rounds, and then getting a good idea of who its investors have been. If I see Founders Fund for disruptive tech or Alexandria for bio, I like my chances.

[Spekulatius]

Thanks Gregmal, your detailed reply is much appreciated.

[Jurgis]

https://www.linqto.com/ is Keiretsu Forum funded company with app that lowers the amount you have to buy to get in. From what I understand they prebuy a bunch of shares with legal agreements and then you're buying from their pool of shares. Which means that you're paying extra to them. How much "extra" who knows. They may disclose - I did not dig.

 

They have a bunch of companies "listed" on their app including Ripple and Linqto itself ( recursion rules LOL ).

 

If anyone sees anything attractive on it and wants to discuss, please post or shoot me PM.

 

If you sign up, you can get a free "The Intelligent Investor: Silicon Valley" ebook: https://www.linqto.com/ebook

 

YMMV. All caveats apply. For accredited investors only. I have not used Linqto myself. I am not affiliated with Linqto or any company mentioned.

[Spekulatius]

https://www.linqto.com/ is Keiretsu Forum funded company with app that lowers the amount you have to buy to get in. From what I understand they prebuy a bunch of shares with legal agreements and then you're buying from their pool of shares. Which means that you're paying extra to them. How much "extra" who knows. They may disclose - I did not dig.

 

They have a bunch of companies "listed" on their app including Ripple and Linqto itself ( recursion rules LOL ).

 

If anyone sees anything attractive on it and wants to discuss, please post or shoot me PM.

 

If you sign up, you can get a free "The Intelligent Investor: Silicon Valley" ebook: https://www.linqto.com/ebook

 

YMMV. All caveats apply. For accredited investors only. I have not used Linqto myself. I am not affiliated with Linqto or any company mentioned.

 

I am not sure I want to invest in upstarts through an upstart. Seems like a lot chained risk here. another Zenequity and Sharepost put your shares in an LLC who’s sole purpose is holding shares in said company apparently.

[Jurgis]

I am not sure I want to invest in upstarts through and upstart. Seems like a lot chained risk here. another Zenequity and Sharepost put your shares in an LLC who’s sole purpose is holding shares in said company apparently.

 

So you are saying that EquityZen and SharePost are not startups?  :o

[Spekulatius]

I am not sure I want to invest in upstarts through and upstart. Seems like a lot chained risk here. another Zenequity and Sharepost put your shares in an LLC who’s sole purpose is holding shares in said company apparently.

 

So you are saying that EquityZen and SharePost are not startups?  :o

 

Well, they have been around for a little, so they should at least be past the Angel Investor stage. But yes you are right, the trust and security question applies to all of them.

 

I am surprised the full service brokers or even Fidelity and Schwab are not active in this business. Seems like a perfect way to build relationships with HNW individuals and those that are on the way of getting there via stock ownership.

[Gregmal]

So just to highlight maybe for those interested in the process...got notification today from EZ another fund launching for Synthego. Fund size is expected to be about $1.1M. Most likely, an existing employee needs some holiday cash or is freeing up some shares to cover taxes...a lot of times these offering are seasonal and for those types of reasons. Tax is almost always the biggest one as folks who get paid in stock need to monetize illiquid assets. So I decide to take down a bit more of this; I already have a decent sized investment, but am doing $20k more just cuz; its been a good stretch run into year end and I freed up some cash recently. Synthego did their most recent funding round in August..they raised $100M in a series D with Wellington joining the party as a lead investor and the same heavy hitter group thats been a part of this for a while also taking part. Founders, Menlo, Intel, 8VC. Valuation was said to be ~$500M. This deal is offering shares at a $400M valuation, so about a 20% discount to the most recent funding. This is pretty standard as the one off employee sales never get a full share of the currently assumed funding valuation, its almost always at fairly large discounts unless there has been a huge time lapse between funding rounds and major narrative change. Otherwise, they just have to accept liquidating into a limited market and pay the price for it. There is more on the research side but thats irrelevant if you're simply interested in the process. So I sign a term sheet today. I have 5 days to read everything over and complete the binding subscription agreement. Then order period ends Dec 15. Then probably a few weeks after I wire funds to their account. From there, the ROFR period is typically a few weeks out. The deal would then probably close sometime in early February. After that, I own shares in the EZ Growth Fund 1234 LLC(or whatever number) and thats basically it.

[Spekulatius]

Gregmal, thanks for the heads on Synthego at EquityZen. I got a notification too and decided to take a closer look. That’s is a reasonable attractive offering based on my 60min of due diligence  :o and having heard of the company before , so I decided to subscribe to this offering of the minimum amount of 10k and see how it goes.

 

From the above platforms, I signed up at Sharepost and EquityZen. I did try to sign up at InvestX, but they asked for sensitive personal information right away (SSN and birthdate etc) which is just too steep of a privacy price to pay to try a platform. here are my impressions:

 

Sharepost : seems to cater to well known pre- IPO companies (Bytedance, SpaceX) and while they state a min amount of 25k, I think most investment actually require 100k.

 

EquityZen: they seem to have a lot more deals but with of less known companies. Min. investment varies, but at least in one case (Synthego) it was 10k with a 5% commission. They also have an IOS app and in my opinion, the GUI is much better than Sharepost.

 

In all of the cases, what you own is not shares directly, but a stake in a LLC with the sole purposes of owning shares in the company. I guess that gets around legalese issues. It’s is similar to VIE’s  for Chinese companies, except you can actually read (and have to sign) the contracts. What is interesting with EquityZen (and perhaps Sharepost) that you do not partake in an offering directly, but buy these shares second hand from an existing shareholder (most likely employee) who want to cash out. In some cases, you can buy in at a discount to the last VC round.

 

Of course one needs to be fully aware that you are buying essentially from an Insider who knows more than you do about the company and without having access to financials. It is more costar tailing other Investors than anything else or buying a used car from Craigslist. Still, just ballpark ing the valuations seem to be quite a bit lower than for public companies (post IPO) in most cases, but of course there is the greater information assymetry and no liquidity.

 

I feel like a patsy on the table here, but also more greedy than fearful  ;D

[Jurgis]

Still, just ballpark ing the valuations seem to be quite a bit lower than for public companies (post IPO) in most cases

 

How would you know that valuation is lower than for public companies if you do not have financials?

Or you're just taking absolute valuation (400M? for Synthego) and comparing it to absolute valuations of public companies? But Synthego may have way lower sales than your comparables. Can you even list comparables without sales breakdown? It also may have lower growth rate.

[Gregmal]

Glad to be (marginally/minimally) helpful.

 

Yea EquityZen lets you do $10k for the first investment. Then minimum is $20k til you've done 5. Then you can do $10 again.

 

And agree on the other stuff. You're kind of triangulating things in the dark while knowing roughly what neighborhood you're in, if that makes sense. Definitely some sleuthing involved.

 

On Synthego specifically, there's definitely not a perfect public comp(part of the uniqueness of the company), but you can look at anything from CRSP, to NVTA, to even probably a better overall comp is something like SDGR, which has been around for 2+ decades and still only has $100M in sales and a $4B+ valuation. Although the simplest way to look at it is that a few months ago they just did a funding round at ~$500M. End of the day I take into consideration a little bit of everything but wouldn't place 100% of faith in any one thing specifically.

[Spekulatius]

Still, just ballpark ing the valuations seem to be quite a bit lower than for public companies (post IPO) in most cases

 

How would you know that valuation is lower than for public companies if you do not have financials?

Or you're just taking absolute valuation (400M? for Synthego) and comparing it to absolute valuations of public companies? But Synthego may have way lower sales than your comparables. Can you even list comparables without sales breakdown? It also may have lower growth rate.

 

The only info I can get is employees (~250 ) and revenues (38-50M depending on sources). Valuation is roughly $420M at the current offering price at EZ.  I am valuing this based on P/S so it’s around a 10x P/S.

 

Synthego’s offering are specialized products and services for CRISP. A public company comp would be TMO, but they are selling very generally things like lab consumables and equipment.  TMO trades at 5.7x EV/ Revenue.

 

Given Synthego’s specialized offerings and hopefully growing revenues, this relative valuation seem to be reasonable based on P/S. Now with ~250 employees and 50M in revenues (assuming the upper boundary) that’s only 200k annual revenue/ employee and means that Synthego certainly generates losses, but this is expected at this point.

 

 

I wonder how I could pull better numbers - perhaps tax records (those would be trailing) or something behind paywalls.

 

Again, the above may all be incorrect and wrong and likely is incorrect to some degree so do your own research.

[Jurgis]

Still, just ballpark ing the valuations seem to be quite a bit lower than for public companies (post IPO) in most cases

 

How would you know that valuation is lower than for public companies if you do not have financials?

Or you're just taking absolute valuation (400M? for Synthego) and comparing it to absolute valuations of public companies? But Synthego may have way lower sales than your comparables. Can you even list comparables without sales breakdown? It also may have lower growth rate.

 

The only info I can get is employees (~250 ) and revenues (38-50M depending on sources). Valuation is roughly $420M at the current offering price at EZ.  I am valuing this based on P/S so it’s around a 10x P/S.

 

Synthego’s offering are specialized products and services for CRISP. A public company comp would be TMO, but they are selling very generally things like lab consumables and equipment.  TMO trades at 5.7x EV/ Revenue.

 

Given Synthego’s specialized offerings and hopefully growing revenues, this relative valuation seem to be reasonable based on P/S. Now with ~250 employees and 50M in revenues (assuming the upper boundary) that’s only 200k annual revenue/ employee and means that Synthego certainly generates losses, but this is expected at this point.

 

 

I wonder how I could pull better numbers - perhaps tax records (those would be trailing) or something behind paywalls.

 

Again, the above may all be incorrect and wrong and likely is incorrect to some degree so do your own research.

 

Having sales estimate is better than going fully blind. So I withdraw some of my previous comments. It might be OK deal to buy it at 10x estimated revenues. Although you still don't know the growth rate - but maybe you can sleuth that too based on past revenue estimates if any can be found.

 

I might still prefer to make angel investing in startup in same (?) space at 8x revenues where I have access to all info and I can talk to management when I want. Although it may have its own issues (it may never take off and die). But I may consider Synthego. Thanks.  8)

[Spekulatius]

^ Or do both. I think the sweet spot for private market shares are those well known entities  that may IPO in a year or two. The earlier ones are too much of a crapshoot , as there is very little information available, unless you are insider. For the larger ones, you can mostly triangulate at least revenues and employee numbers and trends and get some ideas about the culture from Glassdoor etc and news articles and a few other websites (craft.co).

[Jurgis]

^ Or do both. I think the sweet spot for private market shares are those well known entities  that may IPO in a year or two. The earlier ones are too much of a crapshoot , as there is very little information available, unless you are insider. For the larger ones, you can mostly triangulate at least revenues and employee numbers and trends and get some ideas about the culture from Glassdoor etc and news articles and a few other websites (craft.co).

 

I disagree.

 

I think you are likely overpaying for the private stocks on EquityZen. IMO there's tons of dot-com-again bros money sloshing around and some part of it is landing in the sexy EquityZen cos.

 

Not to say that the early startups are cheap or without risks. There's tons of money there too.

 

Early startups are attractive because you can learn about what good businesses are and what good management is. You can see who does what and how good or bad they are. Of course, also a lot of fun tales from the trenches for the parties (some of it how you lost your money  ::) ).

 

I recently ran some calculations on projected returns. There are very few situations that show optimistic annualized after tax return of >20%. And that's usually Optimistic with capital O. Considering that these are private companies / startups with close to zero liquidity, I am starting to strongly wonder if it's worthwhile to invest in private markets. The liquidity in public markets is quite an asset for smallish investors like us. E.g. last March was a great time to rotate into stocks that returned hugely during recovery. And the money in private cos was just inaccessible.

 

But I guess we'll see in couple of years what results of different areas are. 8)

[Jurgis]

BTW, with all that said, if anyone wants to discuss anything selling on

 

Late stage:

https://equityzen.com/

 

Early stage:

https://www.seedinvest.com/

https://republic.co/

https://www.startengine.com/explore

 

feel free to post here or PM me.

 

Although I was against discussing startups that are not publicly advertised, IMO the publicly advertised ones are fair game.  8)

 

Disclaimer: certain investments are limited to accredited investors. Nothing posted is an encouragement to buy/sell any non-public non-listed securities, etc. This is not WSB.  8)