Investing in Pre- IPO firms via ‘SharesPost’

There have been few options till now for the average investor to get in on the action on pre-IPO start ups. The most you could do was to buy shares of large alternative /private equity investment  firms like Blackstone  and  Fortress which in turn invest in these pre-IPO start ups.

A new alternative is being presented by a site called ‘SharesPost’.  ‘SharesPost’ describes itself  as “a passive bulletin board that enables users to post non-binding indications of interest concerning the potential sale of private company shares”

SharesPost lets shareholders of private firms offer their common /preferred shares for sale at a price of their choosing. This includes shares with restrictions such as stockholders’ agreement, rights of first refusal and co-sale rights.  The restrictions are shown in the  seller’s listing of an offer to sell . In a similar fashion buyers can post their interest in buying shares at a price of their choice.

The key to the site is that it provides standardized contracts that either a buyer or a seller can pick up  and associate with their post to buy or sell. Once a buyer is  comfortable with the price and restrictions associated with the stock, both parties e-sign the contract and proceed with the transaction which is facilitated by U.S Bank through the use of an escrow facility.

SharesPost objective is to make it easy to bull/sell stock in interesting late stage private companies.  While this provides exciting opportunities for the average / small investor, there are a few points to note

• The minimum transaction size is $25,000 so it is not really for the ‘small’ investor
• U.S Bank charges a flat $2,500 for each transaction. This again reinforces the fact that you need a large transaction size to make this trade profitable after such fees
• The site offers Valuation research by certain third parties, but given the limited access to information by nature of these companies being private, you do not have the same access to company finances that a large private equity investor can demand and get. So valuation is tricky and so you will see a wide variation in bid / ask prices.
• The depth of the market is very shallow and is barely acceptable for a select few companies. So , don’t expect to see a lot of buy/sell offers

SharesPost is a very interesting concept that is in a very early stage of development and I certainly hope it takes off so that it provides the average investor with the same opportunity that wealthy individuals , private equity firms or investment banks have.

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