how to buy stock before a company goes public

The social media platform is expected to raise as much as $1.6 billion, making it the biggest technology IPO since Facebook (FB) went public in May 2012 and raised a record $16 billion — and investors big and small want a piece of the pie.
Relatively few investors actually get allocated stock at the IPO price, while the rest are left to buy at whatever the market commands, and history has shown that highly hyped stocks (like Twitter) often command enormous prices relative to actual earnings.
Twitter, and pretty much every other company under the sun, will issue various forms of equity while still a private company, either as compensation to employees, payment for an acquisition or to large private investors.

The Existence and Identity of the Underwriter – Has the company retained an investment banking firm to underwrite the offering? If so, which firm? Contact your state securities regulator to find out whether the firm has a history of complaints or fraud.
Many companies and stock promoters entice investors by promising an opportunity to make high returns by investing in a start-up enterprise at the ground floor level — often a new company that claims to be related to the Internet or e-commerce.
Management’s Background – Who runs the company? Have they made money for investors in the past? Have any of them violated the law, including any of the federal securities laws? Your state securities regulator may be able to tell you whether the company and the people who run it have previously defrauded investors.
Check with your state securities regulator to find out whether they have any information about the company, the offering, and the people promoting the deal.
The purchasing of stocks from a company before it goes public can be a bit risky and is easier done if you are a friend, family member or employee of the small business before it goes public.
The best way to get shares of stock in a company before it goes public is to go the company themselves.
It is imperative that any sales made with shares of a company meet both the requirement of the company’s constitution and the COMPANIES ACT 1193.
You can go directly to the investor relations department of a company to look into purchasing the shares, as long as at least one share is owned.
If the company is a private company the rules about buying ans selling shares are set out in the company’s constitution and in the COMPANIES ACT 1993.
There are many ways to purchase shares in a company.
However, this is not the only way to purchase shares in a company.
The reason for this risk is that if the company did not go public, you would not be able to sale your sales in the company easily.
The legal advisers will advice you in what each of the terms of the agreement is for the sale and purchase of the shares.
They are small privately owned businesses whose shares are not traded in the public exchange.
When a corporation grows large enough to go public, an attempt to sell those shares on the public market happens.
Two Web sites — SharesPost.com and SecondMarket.com — provide electronic platforms that allow qualified investors to buy shares from company insiders and employees who want to cash out before a company goes public.
According to published reports, the company earned $355 million on revenues of $1.2 billion in the first nine months of 2010, and experts think sales for the entire year may register at $2 billion.
By offering a way to enter an area previously open only to Wall Street’s elite, "we democratize the opportunity to invest in private company stocks," says David Weir, chief executive of SharesPost.
Neither outfit requires clients to pony up $2 million or more and hold the shares until 2013, as Goldman is stipulating for its Facebook offering.
Why would you want to invest in a nonpublic company? You could become an insider before a firm goes public, presumably at a much higher price than you paid for your shares.
Even more intriguing, though, was the news that Goldman would create a fund through which its clients could buy some $1.5 billion worth of shares in the fast-growing, privately held social-networking company.
Facebook hasn’t yet announced plans for an IPO, but many market watchers expect the Palo Alto, Cal., company to go public next year.
According to the Securities and Exchange Commission, this means investors must have enough knowledge and experience to evaluate an investment’s risks and be able to bear them, and they must have a net worth of at least $1 million or income exceeding $200,000 per year for the preceding two years.
Firsthand Funds says that by the end of 2010, private-equity shares had dropped back under the 15% limit as public stocks recovered from the depths of the recession and valuations of private companies held by the fund fell.
Kinnel says, because coming up with a daily net asset value for the fund that includes proper valuations of all securities "gets awfully messy" when shares of private companies make up a significant portion of the fund.
Kevin Landis, chief investment officer at Firsthand Funds, says the value of two private tech firms owned by Firsthand Technology Value, Radia Communications and Global Locate, doubled by the time the firms were purchased by public companies in 2003 and 2007, respectively.
Shares of private companies ballooned to 26.8% of assets at Firsthand Technology Value at the end of 2009; a Morningstar analyst warned investors away from the fund in August of that year, saying it was too risky.
Firsthand Funds in April reorganized Technology Value into a type of closed-end fund, which has no limit on investments in private companies.
Because of these risks, the Securities and Exchange Commission mandates that shares of private companies make up no more than 15% of an open-end mutual fund at the time of purchase.
A bank or group of banks put up the money to fund the IPO and ‘buys’ the shares of the company before they are actually listed on a stock exchange.
Competition among investment banks for handling an IPO can be fierce, depending on the company that’s going public and the money the bank thinks it will make on the deal.
This statement has detailed information about the offering and company info such as financial statements, management background, any legal problems, where the money is to be used, and who owns any stock before the company goes public.
When an investment bank, like Goldman Sachs or Morgan Stanley is eventually hired, the company and the investment bank talk about how much money they think they will raise from the IPO, the type of securities to be issued, and all the details in the underwriting agreement.
If a company wants to sell stock shares to the general public, it conducts an IPO.
Below is a comparison of private companies to public ones, overview of private company types and varieties, investment options currently available for interested investors, and a survey of other considerations to make when investing in private companies.
Overall, an investor definitely has to work harder an overcome more obstacles when investing in a private firm as compared to a public one, but they work can be worth it as there are a number of advantages to be gained by investing in private companies.
And although the goal of many private firms is to eventually go public and provide liquidity for company founders or other investors, other private business may prefer to stay private given the benefits given above.
This stage is referred to as angel investing, while the private company is known as an angel firm.
This includes when the company goes public, buys out private shareholders, or is bought out by a rival or another private equity firm.
Investing directly is still not going to be a viable option for most investors, but there are still ways to gain exposure to private firms through more diversified investment vehicles.
For example, Hercules Technology Growth Capital (HTGC), a publicly-traded BDC, bought more than 300,000 shares of Facebook when it was still private — giving investors a stake in the company long before its IPO.
Case in point: While these "elites" and company insiders were cashing in shares of Facebook and making millions of dollars from what’s being called "the worst IPO of the last 10 years," the rest of the public was foaming at the mouth to buy shares.
While "the herd" was waiting to cash in on the runaway success of Facebook by buying shares as soon as they went public, the "smart money" was busy cashing out — selling their shares to a frothy public that had waited years for a Facebook IPO.
Simply put, he’s found a unique set of securities that let investors like us buy into some of the world’s fastest-growing companies (including Facebook before it went public) while they’re still in their most lucrative growth stages.
Peter Thiel — one of Facebook’s first investors — made nearly $1.4 billion selling Facebook shares when they went public.
Thanks to a malfunction in the way Nasdaq’s computers handled millions of dollars in trades, as well as allegations that the company and its underwriters were involved in everything from inflating share prices, issuing too many shares and even overstating earnings, the stock eventually went into a tailspin.
What causes individual investors to underperform the market year after year? Volatility? The Fed? In today’s video, Steve Forbes reveals what’s sabotaging your investment strategy – and the simple steps you can take to see consistent gains.
For example, if a company sells its shares to underwriters at $30 a share, and the underwriters sell the shares on the market at $50, and the shares close at $100 at the end of the first day, it’s likely that the company could have sold the shares for a lot more (say $40-$50 a share).
From Wikipedia, “This auction method ranks bids from highest to lowest, then accepts the highest bids that allow all shares to be sold, with all winning bidders paying the same price.” This is much more friendly to the company, since they tend to get a price that’s closer to what would be offered on the public market.
In this case, the company and its institutional investors will agree to sell some of their shares to investment bankers at a slight discount to the current market price.
After the dust settles, the lock-up ends, and the secondary offering does (or does not) happen, employees of the company are left to exercise their options, and sell their shares.
For example, if a startup raises $20 million dollars at $20 per share, and they have 100 million total shares, then the company is worth 2 billion dollars (20 * 100 million).
During the blackout period, which can last anywhere from a few weeks to a couple of months (depending on your company, your individual access to data, etc) employees will not be allowed to trade any of the company’s shares (either buying or selling) to prevent insider trading.
Underwriters are basically a group of banks that buy the pre-IPO shares from the company, and then turn around and sell them on the public market.
This means, when a company like Facebook goes public, the employees are not selling their shares immediately, and have no more money in their bank account the day after the IPO than they did the day before.
If, on the other hand, the shares close flat, it means that the company got as much money as they could out of the market, and their bank accounts are about as high as they could theoretically be.
When companies fight to hire employees, often times, you’ll hear, “Company X offered me 30,000 shares, and company Y offered me 10,000.
A company that wishes to sell some of their shares on the public market must file an S-1 form with the SEC.
To prevent all shares from flooding the market at once, a company can get some of its institutional investors to participate in a secondary offering.
If you compound this with the initial lockup, it means that the company can stage dumping of its shares across a longer timespan (IPO, lock-up expiration, secondary offering), which increases the stability of the stock.
What I mean by this is, when a company raises a round of funding, they sell shares to investors at a given price.
This is, essentially, the opportunity for the company to sell more of its shares on the open market.
For example, if a company has 100 million shares valued at 10 cents each, the company is worth $10 million.
As an example, if a company uses banks as underwriters, the underwriters will sell the shares.
Another way that an employee might reach liquidity with regards to his or her shares is when the company that they work for has a public offering of their shares.
Stock in a public company is traded on the open market, making it very exciting for investors.
The ability to issue more stock when there is a sufficient level of demand makes it easier for a public company to engage in mergers and acquisitions because the deal can include issuing stock.
The registration statement includes the details of the offer and relevant company information, including financial statements, the planned use of the new funds, background on the management, details of any legal problems and insider holdings.
If a company is able to convince investors to purchase their stock, it will be able to raise a considerable amount of cash from an IPO.
Each public company must report particular financial data on a quarterly basis and are required to have a board of directors.
This is a contract between company insiders and the underwriter that specifies the company insiders are not permitted to sell company stock for a set period.
When a company first sells its stock to the public it is known as an IPO.
The main problem occurs when the lock-up period expires and suddenly all the company insiders are allowed to sell their securities.
There is nothing that anyone involved in the company can do to prevent an investor from purchasing company stock.
A public company will generally have a large number of shareholders (into the thousands), and must comply with strict regulations.
As part of the IPO, company employees and officials are required by the underwriter to enter into a lock-up agreement.
If you’re an owner of the business, going public creates a public market where you can buy and sell shares ˆ’ in effect "cashing out" some of your ownership stake in the successful business you helped create.
Instead of borrowing expansion capital, maybe it’s time to consider going public – selling ownership shares of your business to the public.
In other words, before going public, your business needs to prove its value by performing well over time.
Other key factors include meeting guidelines for trading on a major exchange like the NYSE or NASDAQ, and determining with certainty that going public generates enough investor interest for sufficient shares to be sold.
The best reason to create an initial public offering, or IPO, is to create a diversified source of inexpensive capital that helps your business expand.
through the plan is to sell your DRIP shares through a broker.
the rest of the shares in the DRIP using the “average-cost” method.
Q I just bought shares in a particular dividend reinvestment plan.
certifi cate representing all of the shares you own in the DRIP.
now have the shares registered in “street” name.
These plans allow investors to buy shares directly from companies.
shares in their own name, not “street” name.
This is immensely unfair to you because if you’re giving up cash for equity, you are effectively investing in the company but not receiving the favorable terms that other investors get.
The portion of your compensation that you receive in equity will not be accounted for in your future salary bumps at the company, and because salary increases are often given in terms of percentages, your losses will likely be compounded during this time.
Having $200,000 in stock options doesn’t mean anything if you can’t sell your stock, and you can’t sell your stock unless your company goes public or you find a private buyer in a secondary market, which won’t happen unless your company is far down its path to a successful exit.
Even if the company is doing well, your stock options will likely get diluted at some point over your four year vesting schedule when the company raises more money.
Salary accrues over one year, while stock options vest over four years, so in order to break even, the value of your extra stock options needs to be 4x the salary that you’re giving up.
Do not listen to any hiring manager who tells you that in order to protect the company, you need to work for a while before you’ll receive any equity.3 There is a process called “vesting” that takes care of this and any founder who is both honest and knowledgable uses it.
Startups do not typically offer cash bonuses unless they are generating substantial revenues.1 For nonprofitable entities with limited runway, it is much better for everybody that the company provides monthly compensation without accruing variable costs of ~10% of annual payroll every year.
If you get $25,000 in options with a 60% discount, that means the company is chipping in $15,000 for your stock and you’re chipping in $10,000 it.
The only thing that matters in terms of your equity when you join a startup is what percent of the company they are giving you.
Vesting lets the company give you some fixed number of stock options, subject to your working at the company for some period of time.
There are a few situations after joining when you may be granted additional equity: first, as new shares are issued, you may be allotted some of them to avoid dilution; second, equity is sometimes used as a performance bonus, especially when companies don’t have enough revenue to provide extra cash; third, equity is often granted as compensation for a promotion.
Betting on equity should imply that you believe in the vision of the company and that you have immense faith in the people you’re working with.
If you were an investor in the company, your money would have bought you $40k worth of the stock, it would be preferred stock rather than common stock, and it would not be subject to any vesting period.
He is giving up $120k over four years to pick up $175k worth of options, earning 46% more stock per dollar invested than the investors who put in money at a $14M valuation.
Let’s say you got into the company when it had a $4M valuation (A $90k engineer receiving a 0.5% equity grant implies (s)he is early).
If you join such a seed stage company, you should expect to work for less than a market rate salary until a larger round is raised.
So – if you have a monthly vest with a one year cliff and you leave the company after 18 months, you’ll have vested 37.25% of your stock.
It’s a dangerous game to try to anticipate what your shares will be worth, but if you want to indulge, take your percentage, divide it by two to account for dilution and a low strike price, and multiply it by whatever you think the company might sell for.
In reality it should be even more because your stock is going to be a different class than what the investors get, and that means the investors will get preference over you should the company endure a downround or a poor exit.
Companies like Facebook, Twitter, online game site Zynga and business networker LinkedIn have piqued buyers’ interest, and the number of transactions on private exchange markets is growing each month.
(NYSE: GS) invested $450 million in Facebook, valuing the popular social networking site at $50 billion and heightening speculation on whether or not Facebook will go public this year.
Part of what’s fueling the private market growth is that Wall Street is experiencing a shift in IPO business, as companies — especially in the tech sector — take longer to hit public markets.
Speculators think private market popularity in Facebook could increase pressure on the company to go public sooner than later.
Digital Sky started its involvement in the social networker in 2009 with a $200 million investment and now has about a 10% stake through stock purchases from Facebook employees.
Some investors think the inquiry will push Facebook to go public sooner than Zuckerberg has led everyone to believe, since the SEC is likely to find there are far greater than 500 investors and the company should publicly disclose its financials.
“When you think back to the early days of Google, they were kind of ignored by Wall Street investors, until it was time to go public,” Chris Sacca, a Silicon Valley angel investor, former Google employee and current Twitter investor, told The Times.
Goldman is planning to create a “special purpose vehicle” to allow high-net-worth clients to invest in Facebook, sources speaking on the condition of anonymity told The Times.
Digital Sky Technologies, a Russian investment firm that has already put about half a billion dollars into Facebook, also invested an additional $50 million in the deal.
The sources said Goldman could pool money — as much as $1.5 billion — from thousands of investors for a stake in Facebook.
Analysts wonder if the deal is a precursor to Facebook going public despite Chief Executive Officer Mark Zuckerberg’s denial of a 2011 initial public offering.
The deal highlights the booming popularity of social media sites like Facebook, Twitter and Groupon – all of which are gaining increased attention from investors.
Honest Co.
Part of the turmoil is coming from within, in the form of employees and former employees who own options or stock and are itching to see some financial rewards, even if their companies haven’t yet achieved a traditional “exit” in the form of an acquisition or public offering.
But the idea that startup employees should also be able to sell their shares on the secondary markets is entirely a product of the Facebook era—and the two companies pushing the concept hardest are SecondMarket and its main competitor, San Bruno, CA-based SharesPost.
These options, which typically vest over the course of four years, are supposed to incentivize employees to stick around and work harder by dangling the prospect of a big payoff if the company eventually gets acquired or goes public.
But these days, many of the disruptors are being disrupted, as the traditional system of incentive-based stock options for startup employees comes under strain.
Back in the 1990s, when incentive-based stock option packages became common, it was reasonable to expect that a company would achieve some kind of an exit—either an acquisition or IPO—within the four-year time frame, making the notional value of employees’ options very real.
Then after a few years they say: “Wow, the company just raised a huge round or has promising prospects to be acquired for a lot of money or file for IPO! I should exercise those stock options I haven’t been thinking about!” These people usually don’t bother to talk to a tax attorney or even a mentor; they just fill out their options paperwork, write a small check, and the company duly processes it.
Without an 83(b), your vesting is counted as income under AMT since your restricted stock that you paid $X for is converting into common stock that’s worth more ($Y>$X), since hopefully the company is getting more valuable.
Income from non-quals for instance, are recognized upon you exercising the option – you decided to exercise and paid cash or performed a cashless exercise, while for restricted stock there is no cash due and vesting happens automatically based on the deferred compensation plan.
For example, if you receive RSAs/RSUs and do not make an 83(b) election when the stock vests you recognize ordinary income equal to the fair market value (FMV) of the stock on the vesting date.
#3 (having a company allow the employee to cash in some options to take care of the AMT due from the exercise) sounds like a really cool / sweet thing for a company do to help out employees, but I’ve not often seen this done – is this a practice you’ve seen commonly? Conversely with #4, I’ve seen early exercises fairly commonly permitted at startups, whereas RSAs/RSUs tend to be more relevant for late stage (public or near-public) companies.
If certain holding period requirements are met then there is no income recognized from its exercise, contrast non-quals in which there is income recognized equal to the intrinsic value of the stock received, fair market value less price paid to exercise.
Continuing this theme of wanting to focus on the likely scenarios that a startup employee will face, most startup options are priced at FMV and thus don’t have any exercise income to recognize if a forward exercise is done relatively expediently (since the FMV has not had a chance to tick upward between when the employee was hired vs exercised), which should address your point #2.

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