Investing in private companies can offer a unique opportunity to access innovative businesses before they go public. Unlike stocks traded on major exchanges, private shares often require investors to meet specific qualifications. Whether through private funds, secondary markets, or direct investments, purchasing private company shares can be rewarding, but it can also come with risks. This blog will explore some of the different ways to buy shares in private companies and key considerations before diving into the private market.

Buying Shares in Private Companies

Understanding Private Company Shares

Unlike publicly traded stocks, which are available on stock exchanges like the NYSE or NASDAQ, private company shares are not freely traded. Instead, ownership is typically limited to company founders, employees, venture capitalists, and accredited investors.[1]

These shares are often subject to transfer restrictions, making liquidity more complex compared to publicly traded stocks and the shares are typically held for a significantly longer period of time. For certain investments, only accredited investors are eligible to make investments due to the restrictions, capital requirements, and the amount of risk that is associated with private investments. There are also many pros and cons to investing and buying shares in private companies, which you can learn more about here.

How to Buy Shares in Private Companies

Invest Through Private Equity Funds

Investors can gain exposure to private companies by investing in private equity funds. These funds gather capital from investors and allocate it to private businesses that typically fit within a predetermined investment thesis in terms of industry, stage, or other factors. Investments in private equity funds may also spread one investment across multiple companies, helping investors benefit from professional management and diversified portfolios.

Participate in Secondary Markets

There are platforms that help facilitate the buying and selling of private company shares. Secondary marketplaces like MicroVentures enable accredited investors to purchase shares from existing shareholders (such as founders, employees, or early investors). MicroVentures and other platforms can provide access to some of the high-profile private companies.

For instance, an investor looking to buy pre-IPO shares in companies like Anthropic, Stripe, or Databricks might find opportunities on these platforms. However, pricing is often negotiated between sellers and the secondary marketplace, and availability depends on supply and demand.

Direct Investments in Private Companies

Direct investments in private companies can also be an option for investors who are looking to buy shares in private companies. Some ways to participate include:

• Angel Investing: Providing early-stage capital in exchange for equity.
• Private Placements: Participating in fundraising rounds, such as Series A, B, or later-stage investments.
• Special Purpose Vehicles (SPVs): Pooling capital with other investors to purchase a stake in a private company.
• Regulation Crowdfunding: Investing in early-stage companies via online platforms through limited investments from a large number of investors.

Stock Options and Employee Equity Programs

If you work for a private company, you may have the opportunity to acquire shares through stock options or employee stock purchase plans. In some cases, depending on restrictions set by the company, employees can sell these shares on secondary markets, providing another way for outside investors to gain access to opportunities they may not have originally been able to access.

For example, employees at companies like Palantir or Reddit received stock options before their companies went public. Some employees chose to sell their shares via secondary platforms before the IPO, offering investors a chance to buy in before the company went public.

Considerations When Buying Private Shares

Accredited Investor Requirements

Many private investments are restricted to accredited investors—individuals who meet specific income or net worth thresholds. However, there are also opportunities for non-accredited investors in the form of Regulation Crowdfunding. These offerings are private market opportunities but are available to people who do not meet the accredited investor requirements.

Limited Liquidity

Unlike publicly traded stocks, private company shares are not easily sold. There is no open market for trading, which means investors may need to hold onto their shares for an extended period. Some secondary markets provide liquidity options, but access is often limited.

Due Diligence

Private companies are not required to disclose financial statements and operational details to the public in the same way as public companies. As a result, investors may have to conduct extensive due diligence by reviewing financial reports, assessing leadership teams, evaluating business models, and understanding the risks associated with the company’s industry.

Long-Term Investment Horizon

Private investments typically require a long-term commitment. Unlike public stocks, where investors can sell shares more easily, investors typically hold on to private shares for a significantly longer period of time. Investors should be prepared to hold their investments until failure or an exit event, such as an acquisition, merger, or initial public offering occurs.

Key Takeaways

Investing in private companies offers opportunities but it does also come with challenges. Some key points to remember:

• Private shares are not as liquid or as easily accessible as publicly traded stocks
• Investors can gain exposure through private equity funds, secondary markets, direct investments, or employee programs
• Private investments typically require a long-term commitment and may only become liquid during major exit events like IPOs or acquisitions, assuming the company does not fail

Final Thoughts

From navigating accredited investor requirements to dealing with limited liquidity and conducting thorough due diligence, understanding the private market is essential before making an investment. Investors should carefully assess their risk tolerance and long-term financial goals before diving into investing in private markets. With the right research and due diligence, buying shares in private companies could be an option for your investment portfolio.

Want to learn more about buying shares in private companies? Check out the following blogs to learn more:

• The Pros and Cons of Investing in Private Companies
• Investing in Startups: Things You Need to Know Before You Invest
• How to Get into Private Equity
• Interpreting Business Models in the Private Market: What You Need to Know

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

 

[1] https://smartasset.com/investing/how-to-invest-in-private-companies

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.