Today we’re going to look at a premier pre-IPO investment platform called EquityZen. EquityZen offers investors the chance to invest in some of the world’s hottest startups.
I should note first that minimum investments on EquityZen are typically $20,000. If that’s too much for you, we recommend sticking with MicroVentures, where minimums are lower.
EquityZen is basically a startup equity matchmaker. It matches insiders (investors and employees) from top startups who are looking to sell a portion of their shares with accredited investors who want to buy them.
This is an important service that is sorely needed in today’s world. Because companies are staying private so much longer than they used to, employees with stock options and early-round investors often want to sell a piece of their equity.
By the way, it’s not necessarily a bad sign that insiders are selling their shares. For these insiders, it’s perfectly logical to diversify a chunk of their company shares into multiple investments. And many early employees don’t want 90% of their net worth tied up in a single startup’s equity.
By offering this service, EquityZen is providing what is called “secondary market liquidity” for private company shares.
“Late Stage” – a Broad Category
EquityZen is considered a “late-stage” or “pre-IPO” investment platform. However, “late stage” can be a rather broad term. Company valuations (market capitalizations) in private deals on EquityZen range from a low of around $300 million all the way up to $60 billion or more.
Generally speaking, the smaller companies offer higher potential rewards but more risk. However, all companies that are large enough to be considered “late stage” are considerably less risky than “early-stage” or “angel” investments.
The larger companies on EquityZen (and other pre-IPO sites like MicroVentures) are mature and relatively safe investments. Think about companies like Airbnb, or Pinterest and Uber before they IPO’d.
If you choose wisely among these late-stage investments, they can do very well in a short time. For example, in August 2018, Slack raised a $400 million round at a $7.1 billion valuation. Today, just over a year later, it’s trading at a $15 billion valuation (market cap). I saw Slack listed on multiple pre-IPO platforms both before and after that 2018 round, so accredited investors certainly could have gotten in on this one.
Personally, I prefer the earlier end of the “late-stage” spectrum. These companies are generally younger and growing more quickly. However, this reflects the fact that I have 20 years until I plan to retire. If you’re already retired, or soon will be, you may want to focus on the more mature companies, which may IPO sooner. It’s up to you.
If you do choose to invest in smaller pre-IPO companies, just be aware that the company may not IPO (or be acquired) for some time. And, of course, there is more risk of a company failing at the earlier stages. It doesn’t happen too often in the pre-IPO market, but it does happen.
Valuation (Price)
The price you pay for startup shares on sites like EquityZen is generally based on the company’s last round of funding.
Beside each deal on EquityZen’s deal listing page, you will see a field that shows either “X% discount to last valuation” or “X% premium to last valuation.” For example, a company’s last round of funding valued it at $1 billion, but there’s a 25% discount to the last round’s price.
Shares are discounted or assigned a premium based mostly on supply and demand. But don’t let a discount scare you off from a promising investment. Private markets are quite inefficient compared with public ones.
Oftentimes a previous round was based on the price a venture capital firm paid for “preferred shares.” Preferred shares come with additional benefits, such as higher liquidation preference (if the company fails, they get first dibs on the assets).
Common shares, which is what employees are rewarded with, come last in terms of liquidation preference. So when common shares are sold on secondary markets, they typically trade at a “discount” to the preferred shares.
So again, don’t read too much into the discount or premium to the last round’s price. If the company has outperformed since its last round, the price may be a little higher.
However, if the discount is drastically lower than the last round (around 50%), that could signal something more serious is going on at the company.
Getting Signed Up
Note: I recommend using a laptop or a PC rather than your phone for this process.
First you will need to register for an EquityZen account, which you can do here. You will need to verify your email address and the fact that you are an accredited investor. Follow the instructions and prompts closely.
After you’ve been verified, you can start browsing live deals at EquityZen here.
EquityZen offers toll-free phone support at 877.490.6121. You can also email at hello@equityzen.com.
For more information, read this letter from the CEO.
Good investing,
Adam