Pre-IPO Explained: What You Need to Know

In the past few years, pre-IPO trading has become a popular trading opportunity. Those who want to trade in a promising company often seek this type of trading before it becomes widely available.

In this article, we will discuss the concept of pre-IPO and provide techniques to join the IPO process and methods to evaluate companies for a successful IPO trade.

What is pre-IPO?

Pre-IPO, short for "pre-initial public offering," refers to the phase in a company's lifecycle that precedes its initial public offering (IPO). 

During a pre-IPO, companies are funded by venture capitalists, angel investors, or private equity firms. They build the capital foundation for startup companies to operate. 

The establishment of pre-IPO lets you trade in these private companies with the hope of achieving a potential capital return when the company eventually goes public.

How does pre-IPO work?

The process of pre-IPO involves purchasing shares in a private company before it becomes publicly traded. 

You can purchase and trade pre-IPO shares through various channels, such as private equity firms, venture capital funds, or online platforms that connect individual traders with pre-IPO opportunities. 

The shares acquired during this phase are typically priced at a discount compared to the expected IPO price, offering the potential for significant returns if the company performs well after going public.

3 major benefits of trading in a Pre-IPO 

Pre-IPO has advantages that attract traders looking to diversify their portfolios. Here are the three main benefits of trading in a pre-IPO: 

1. Potential for early revenues

Pre-IPO traders can acquire shares at a lower price than the anticipated valuation when the company goes public. 

This early entry entitles traders to benefit from what is known as "price appreciation." As the company matures and its value increases, the shares purchased in the pre-IPO phase may significantly appreciate in the long run.

2. Limited competition

In contrast to publicly traded stocks, where millions of traders actively trade, pre-IPO acquisitions tend to attract a more exclusive group of participants. 

The limited competition can be advantageous for pre-IPO traders. With fewer individuals competing for shares, there's a reduced risk of price volatility due to high trading volumes. 

This relative scarcity can also lead to more favorable terms and pricing for pre-IPO investors, making it an appealing avenue for those looking to trade with a potentially less crowded field.

3. Influence and information

Some pre-IPO traders, particularly more prominent institutional investors or strategic partners, may be privileged to access insider information and enjoy a closer relationship with the company. 

Confident pre-IPO investors can also have a chance to participate in discussions and decisions that can influence the company's direction. Such involvement can benefit traders seeking to align their interests with the company's growth and success.

How to acquire Pre-IPO opportunities

Pre-IPO opportunities can be challenging, as they are typically unavailable to the general public. These opportunities are often reserved for accredited traders, institutional investors, and company employees. 

However, there are several methods you can consider if you're interested in getting access to pre-IPO opportunities:

Become an accredited trader

Many pre-IPO acquisitions are restricted to accredited traders who meet certain income and net worth requirements. 

In the United States, for example, to qualify as an accredited trader, you need to have an annual income of at least $200,000 (or $300,000 for joint income) for the last two years with the expectation of earning the same or higher income in the current year. 

Alternatively, you must have a net worth of at least $1 million, excluding your primary residence. Satisfying these criteria will make you an accredited trader and open more stock trading opportunities.

Start building a network 

A strong network group within the trading and startup communities can provide you with valuable connections and opportunities. 

You may attend industry conferences, join relevant forums and discussion groups, and establish relationships with venture capitalists, angel investors, and entrepreneurs who may have information about upcoming pre-IPO opportunities.

Engage with trading firms

Some trading firms and venture capital funds specialize in pre-IPO acquisitions. 

You may contact these firms and express interest in pre-IPO rounds. They may include you in their trader network and notify you of relevant opportunities.

Check online IPO platforms

Some online platforms and marketplaces cater to accredited traders interested in pre-IPO shares. Examples include EquityZen, SharesPost, and Forge Global. These platforms can connect you with opportunities to trade in private companies on the path to going public.

Participate in employee stock programs

If you work for a startup or company planning to go public, you may have the opportunity to acquire pre-IPO shares through employee stock programs or stock options. 

It is common for employees to significantly participate in the company's growth before it goes public if they have met the requirements for the pre-IPO.

How to evaluate Pre-IPO companies

Here are the key factors you must look at to evaluate a pre-IPO company. 

First, the company's product or service should have a market potential. You must look for indications of a unique value proposition or a disruptive business model, such as qualities, features, or benefits that competitors can't offer or replicate easily.

Second, you may review the company's financial statements, which include income statements, balance sheets, and cash flow statements. 

It allows you to scrutinize past financial performance to discern patterns and assess the company's capacity to achieve profitability and give dividends to its traders. 

Finally, you must confirm the company has the best management team. The CEO and key executives must have experience in leading a company effectively. 

You may search for it on social media platforms like LinkedIn, as most leaders and influential people post their past experiences on this platform.

Achieve an IPO stock trade with markets.com today

Pre-IPO trading allows individuals to trade in promising private companies before they become publicly traded. 

It would help if you engage in trading networks and online platforms, become an accredited trader, and participate in employee stock programs to acquire IPO opportunities.

As soon as you have obtained an IPO opportunity, you can now evaluate it through its market potential, financial statements, and management team. Doing so increases the likelihood of selecting a good stock that will give you a good amount of potential capital return.  

If you consider trading in IPOs, you may trade in a contract for difference (CFD). This method allows you to speculate the prices of IPO stocks without owning an asset. It makes it easier and swift to trade whenever you want. 

When considering "CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.