Cash out pre-IPO for 5%?
- curiouskitty
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Cash out pre-IPO for 5%?
I recently read a WSJ article about Equidate, which matches up buyers and sellers of pre-IPO startup stock. Equidate has a contract that transfers "the economic upside" of the shares (without transferring the actual shares) for 5% (probably on both sides, but at least on the seller side).
What would your advice be for someone who has low seven figures in a pre-IPO startup thats worth ten figures? If the startup has been doing well, is it worth losing 5% to take some or all of the money out now? I don't care about having the money immediately so its more about avoiding ridiculous fees vs. diversifying sooner.
What would your advice be for someone who has low seven figures in a pre-IPO startup thats worth ten figures? If the startup has been doing well, is it worth losing 5% to take some or all of the money out now? I don't care about having the money immediately so its more about avoiding ridiculous fees vs. diversifying sooner.
Re: Cash out pre-IPO for 5%?
Be very careful here. What if you end up owing the "upside" as a cash settlement but can't sell your shares? (because they are unregistered, or an obligation to continue owning, or some other). Also, you might be in a conflict of interest situation with your employer, since you are considering the equivalent of a short sale. The 5 % fee is the least of your worries.
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Re: Cash out pre-IPO for 5%?
If you want to play in the market check out the sharespost 100 fund.curiouskitty wrote:I recently read a WSJ article about Equidate, which matches up buyers and sellers of pre-IPO startup stock. Equidate has a contract that transfers "the economic upside" of the shares (without transferring the actual shares) for 5% (probably on both sides, but at least on the seller side).
What would your advice be for someone who has low seven figures in a pre-IPO startup thats worth ten figures? If the startup has been doing well, is it worth losing 5% to take some or all of the money out now? I don't care about having the money immediately so its more about avoiding ridiculous fees vs. diversifying sooner.
Re: Cash out pre-IPO for 5%?
The FAQ suggests that they understand lockups and that the derivative contract wouldn't come due until after that time. Alternatively, I think both parties would be best served by resolving the contract by delivering the shares, which they also suggest may be possible.
https://www.equidateinc.com/faq
The default risk you should worry about as a seller of pre-IPO shares is that you "sell" the shares via a derivative contract at $10 and now the stock falls. The counterparty owes you money for the drop from your agreed price, but what if they don't pay up? Similarly, a buyer should worry about the situation where he "buys" the shares via a derivative, the stock soars, and the seller refuses to pay up or decliner the shares as promised. I don't know if they do escrow or other things to handle the credit risks here.
https://www.equidateinc.com/faq
The default risk you should worry about as a seller of pre-IPO shares is that you "sell" the shares via a derivative contract at $10 and now the stock falls. The counterparty owes you money for the drop from your agreed price, but what if they don't pay up? Similarly, a buyer should worry about the situation where he "buys" the shares via a derivative, the stock soars, and the seller refuses to pay up or decliner the shares as promised. I don't know if they do escrow or other things to handle the credit risks here.
Re: Cash out pre-IPO for 5%?
To answer OPs question, paying 5% to diversify some of a multimillion dollar holding doesn't seem unreasonable, and this commission sounds about right for brokering transactions in private stock. I would certainly investigate all my options carefully, especially if the company has a "right of first refusal" clause for transactions in their stock. If so, you might be able to line up a buyer and then have the company step in and buy the shares from you instead, which avoids all the headaches (although it doesn't get your shares to the person who wanted to buy them, and they may well bid less knowing there's a good chance they're going through all these negotiations for nothing).
- curiouskitty
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Re: Cash out pre-IPO for 5%?
Thanks for the responses!
There is no longer an employee-employer relationship in play so that isn't anything to worry about. Equidate purposely uses a contract that doesn't transfer the shares in order to avoid restrictions on transfers that are fairly standard these days. That is why I mentioned them in particular - it seemed like their competitors mostly relied on share transfers and hadn't been working with this company. That said, setting up a situation for the company to use the right of first refusal is an interesting idea.
It doesn't seem like there is that much downside risk for me other than the fee as I would get cash up front, they claim it would be treated as a standard disposition subject to long term capital gains, and then I'd pay them money (presumably by selling to cover) when an IPO happens. There is obviously the gamble of whether to stay in the high flying stock or not, but that seems like a separate (non-boglehead) decision.
wfrobinette: have you actually invested in that fund? it does seem like the traditional money managers are moving to late stage deals instead of IPOs as a way to make long-term investments earlier at more reasonable prices. The fees on these sorts of things are normally the bee in the honey
There is no longer an employee-employer relationship in play so that isn't anything to worry about. Equidate purposely uses a contract that doesn't transfer the shares in order to avoid restrictions on transfers that are fairly standard these days. That is why I mentioned them in particular - it seemed like their competitors mostly relied on share transfers and hadn't been working with this company. That said, setting up a situation for the company to use the right of first refusal is an interesting idea.
It doesn't seem like there is that much downside risk for me other than the fee as I would get cash up front, they claim it would be treated as a standard disposition subject to long term capital gains, and then I'd pay them money (presumably by selling to cover) when an IPO happens. There is obviously the gamble of whether to stay in the high flying stock or not, but that seems like a separate (non-boglehead) decision.
wfrobinette: have you actually invested in that fund? it does seem like the traditional money managers are moving to late stage deals instead of IPOs as a way to make long-term investments earlier at more reasonable prices. The fees on these sorts of things are normally the bee in the honey
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Re: Cash out pre-IPO for 5%?
But what happens if the IPO is delayed, possibly for many years. Or the company hits rough times before the IPO and the stock price tumbles. How does this work with shares that may be subject to continued employment or buyback by the company in the event of separation? Seems like there could be many risks.It doesn't seem like there is that much downside risk for me other than the fee as I would get cash up front, they claim it would be treated as a standard disposition subject to long term capital gains, and then I'd pay them money (presumably by selling to cover) when an IPO happens.
- curiouskitty
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Re: Cash out pre-IPO for 5%?
The investor buys the upside and the downside of the shares so if there is no IPO then they bought a losing ticket and its on them. This gets the shares totally off my hands (effectively) since I will take money and pay taxes now. I should add that Equidate already regularly sells stock from my former company so I wouldn't be a trailblazer in that regard.downshiftme wrote:But what happens if the IPO is delayed, possibly for many years. Or the company hits rough times before the IPO and the stock price tumbles. How does this work with shares that may be subject to continued employment or buyback by the company in the event of separation? Seems like there could be many risks.It doesn't seem like there is that much downside risk for me other than the fee as I would get cash up front, they claim it would be treated as a standard disposition subject to long term capital gains, and then I'd pay them money (presumably by selling to cover) when an IPO happens.
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Re: Cash out pre-IPO for 5%?
Take *something* off the table by this route.curiouskitty wrote:The investor buys the upside and the downside of the shares so if there is no IPO then they bought a losing ticket and its on them. This gets the shares totally off my hands (effectively) since I will take money and pay taxes now. I should add that Equidate already regularly sells stock from my former company so I wouldn't be a trailblazer in that regard.downshiftme wrote:But what happens if the IPO is delayed, possibly for many years. Or the company hits rough times before the IPO and the stock price tumbles. How does this work with shares that may be subject to continued employment or buyback by the company in the event of separation? Seems like there could be many risks.It doesn't seem like there is that much downside risk for me other than the fee as I would get cash up front, they claim it would be treated as a standard disposition subject to long term capital gains, and then I'd pay them money (presumably by selling to cover) when an IPO happens.
Maybe only 10% of your money. Not more than 50%. But take something off the table. It's worth the risk.
These IPO markets are very cyclical. You can lose the window, wait 5 years, get 1/10th of what you expected. Been there and done that in early 2000s (in a slightly different way-- post IPO lockins). Right now there's another tech bubble, crazy valuations on pre IPO rounds, everybody trying to get on board. It's not as bad as 99-2000 but it's a bubble alright, it might double from here, but it will popl.