Secondary transactions offer accredited investors a great opportunity to diversify their portfolios by adding late-stage private investments to the mix. But using a forward contract to purchase private equity can add unnecessary risk to an already inherently risky transaction. You can read more about the risks of forward contracts – and how to mitigate them – in our recent feature on VentureBeat.

Forward contracts are one of the oldest financial instruments known to humankind. Not to be confused with futures contracts, a forward contract is a private agreement that obliges one party to buy and one party to sell specific assets at a specific price on a specific future date, where the sale date and price are fixed when the contract is executed.

But unlike futures contracts, forward contracts are not traded through an exchange or clearinghouse and are not settled on a daily basis. They are also not standardized the way futures contracts are. The fact that they aren’t regulated, monitored, or standardized is one of many reasons investors need to evaluate them very carefully, especially when using them as part of a secondary transaction.

In the context of a private equity transaction, forward contracts work very differently than they do in commodities or currency trading. For one thing, the investors are essentially paying someone today to deliver shares at a specified future date or event. But a lot of things can happen between the execution of the contract and the delivery of shares, and most of that risk is completely outside an investor’s direct control.

At MicroVentures, we’ve facilitated secondary transactions for companies like Facebook, Twitter, Yelp, and Box prior to their IPO, all without using forward contracts. We often source secondary investments in late-stage companies from existing shareholders, providing liquidity to early investors or former employees by purchasing their preferred or common shares outright. In some instances, we participate in tender offers, in which current employees sell shares in the secondary market to institutional investors. In all cases, these secondary transactions are transparent to all parties involved, and the process eliminates the risk associated with future delivery.

Visit our Education pages to learn more about late-stage investing on the MicroVentures platform.