EquityZen Review [2024]: Can You Really Invest Pre-IPO?

You don’t have to wait until companies go public on the stock market to invest. With more companies staying out of the initial public offering (IPO) market longer, investors are able to put money into private equity investments with the help of companies like EquityZen. These companies facilitate making employee and angel investor shares available for limited purchase to select investors.

This EquityZen review will go over what the company does, who can invest, and what the minimum investment is.

What is EquityZen?

EquityZen is an investment company, online platform, and broker-dealer founded in 2013 in New York, New York. It was founded by Shriram Bhashyam, Atish Davda, and Phil Haslett, who were looking to help more accredited investors find suitable private market, pre-IPO investments.

EquityZen is capitalizing on the fact that many stockholders in private companies want to liquidate or sell capital sitting in shares while investors are looking for the next big play. These pre-IPO shares are typically illiquid, so this arrangement benefits those who hold the shares and investors hoping to invest in potential unicorns (startup companies that reach a value of over $1 billion).

This fintech company utilizes technology and market expertise to help investors find the right opportunities in the private equity market. Investors can buy pre-IPO, late-stage investments through EquityZen’s investment funds, most of which are in tech companies.

EquityZen has more than 260,000 shareholders and investors spread across the world, with more than 29,000 investments closed. Over 350 companies have been served with a combined estimated market capitalization of $1.13 trillion. Market capitalization is the total market value of all of a company’s shares of stock.

The founders built the marketplace so that investors can capitalize on pre-IPO shares, noting that private companies were staying private longer. This creates an opportunity for EquityZen’s clients to consider how to invest money in this previously untapped market.

There are three categories of offerings with EquityZen: single company funds, multi-company funds, and direct share acquisitions.

• Single company funds: You invest in an EquityZen fund that acquires shares from a specific company.
• Multi-company funds: You invest in multiple companies through an EquityZen investment vehicle.
• Direct share acquisition: EquityZen facilitates the purchase directly between the company and the investors.

How does EquityZen work?

EquityZen is a marketplace and investment platform. It works with existing employee shareholders or angel investors who want to liquidate some or all of their private shares and transfer these to new retail investors.

Because companies are taking longer to go public, much value creation is happening privately, before the IPO. Many angel investors want out of what used to be shorter positions. By giving investors access to private stock earlier in the going public process, they can take advantage of company growth while it’s still in the private sector. Angel investors can take their earnings and look for new opportunities.

Like publicly traded exchanges, EquityZen’s marketplace is based on supply and demand. The pricing is negotiated with the seller and can vary based on several factors. Once the share price is determined, EquityZen will then go to the company to get company approval for the transaction. In most cases, companies don’t have a problem with the sale since EquityZen ensures that the sale abides by the transfer restrictions.

EquityZen structures most of these transactions as a special purpose vehicle (SPV). SPVs for EquityZen's single company and multi-company funds are LLCs that buy and hold the shares on behalf of the accredited investor. When a direct transaction, EquityZen brokers the transaction for direct purchase of the company stock.

If the company goes public, investors receive actual company shares in their investment accounts after an initial lockup period.

What are EquityZen’s fees?

EquityZen charges a percentage of your investment as a fee. This fee ranges from 3% to 5% of your investment into single company funds or direct investments. Multi-company funds charge an annual fee that ranges from 0.75% to 2%, with a 10% to 15% carry (a portion of the future earnings).

Who is EquityZen best for?

Investing in opportunities through EquityZen isn’t for everyone. EquityZen is for the accredited investor who understands the risk of private ventures.

While EquityZen analyzes companies and chooses ones with track records of raising funds from venture capital investors, there are no guarantees with these investments. Company valuations may decline, even going to zero in some instances. You need a high risk tolerance to invest in pre-IPO companies.

The Securities Exchange Commission (SEC) defines the criteria for an accredited investor. EquityZen performs its due diligence to ensure that only accredited investors buy private equity shares, as it is a highly volatile market that requires financially sophisticated investors.

An accredited investor is defined as someone who:

• Has earned income of more than $200,000 ($300,000 as a couple) in each of the prior two years and expects to earn the same in the current year, or
• Has a net worth more than $1 million on their own or as a couple (excluding primary residence), or
• Holds a Series 7, 65, or 82 licenses currently in good standing

By defining an accredited investor in this way, the SEC can maintain confidence that the investor is savvy enough to understand the risk of private investments. Unlike SEC-registered offerings, private investments don’t have the same disclosure requirements. This means that the investor must be able to better ascertain risk.

Even if you qualify as an accredited investor, you should get into private equity scenarios with a heavy amount of caution. If you are new to investing in this way, you may want to limit the amount you invest into EquityZen.

The minimum investment for EquityZen depends on the type of investment. Some single company funds have a minimum of $10,000, while direct investments have a minimum of $200,000.

How much can you earn with EquityZen?

It’s difficult to predict how much you could earn with EquityZen. The company is very straightforward on its website that through June 30, 2021, investors saw annualized returns that ranged from a 100% loss to a 2,831% gain on investment.

Investors need to understand that there is a high level of risk involved in investing in pre-IPO companies. There is a lot of money that could be made but there is also the chance that you will lose everything. This is why it is only open to accredited investors who can withstand a financial hit to their assets.

While EquityZen does provide investment return history, it warns investors not to place a lot of reliance on annualized return calculations and cap tables. Market risks and the timing of investment exits can dramatically affect the return on investments. The internal rate of return also makes several assumptions such as a reinvestment of any distributions and holding the investment continuously.

As with any type of equity investment, past performance is not indicative of future results. Each of the private equity investments EquityZen makes for clients has its own financial history, future outlook, and rate of return.

How to open an EquityZen account

Before you can invest in EquityZen equities, you’ll need to open an account. Opening an account requires the following steps:

1. Register for an online account
2. Confirm your email address
3. Define whether you are investing as an individual or institutional investor
4. Answer the questionnaire about being an accredited investor
5. Go through the suitability questionnaire
6. Set up an investor profile
7. Choose your investment

Note that EquityZen does not ask for documentation to determine if you are an accredited investor or not. However, failure to provide honest answers about being an accredited investor could lead to repercussions.

Alternatives to EquityZen

EquityZen is not the only player in the space of pre-IPO equity sales. The company’s primary competitors are:

• EquityBee: Allows startup employees to exercise stock options
• InvestX: A private equity platform providing pre-IPO access to broker-dealers and investment advisors
• Forge Global: Another marketplace that provides an opportunity for private investors to get pre-IPO company stock

Investors who find EquityZen’s model attractive tend to be aggressive investors looking for high rates of return. This type of investor is used to high fluctuations in investment values. Other types of investments that would be suitable for these types of investors include small-cap stocks and certain international investments.

FAQs

Bottom line

EquityZen is a great opportunity for accredited investors to buy pre-IPO stocks in the secondary market. For example, you could learn how to buy Instacart stock. While you can’t predict how well a company will do, there is a lot of room for growth in the private equity market. Stockholders get an outlet to cash out on their equities while new investors can capitalize on continued growth. It’s important to fully research any investment opportunities offered by EquityZen prior to committing your funds.

If pre-IPO investing sounds appealing, learn more about how to become an accredited investor.

FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.