What is the difference between unlisted and pre-IPO shares?

Introduction

Unlisted shares are those of a corporation that does not trade on a stock exchange. These shares are commonly held by the company’s founders, early investors, and employees. Unlisted shares are often acquired and sold privately between investors.

Pre-IPO shares, on the other hand, are those of a firm that will shortly go public via an Initial Public Offering (IPO). These shares are frequently sold to institutional investors or High Net Worth Individuals (HNIs) before the IPO. The concept is that investors can purchase shares at a reduced price before the firm goes public, and then possibly sell those shares at a greater price after the stock is publicly traded.

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What aspects should you consider while investing in pre-IPO or unlisted shares?

Buying unlisted or pre-IPO (Initial Public Offering) shares can potentially offer higher returns compared to buying shares in a company that has already gone public. However, investing in unlisted or pre-IPO shares can also be riskier due to the lack of transparency and regulatory monitoring. Some of the factors to be considered while investing in pre-IPO or unlisted shares are outlined below.
Organization performance.

The first step for investment in any company is thoroughly researching the same before considering investing in it. This is reviewing the company’s financial statements to see how much revenue it’s generating, how profitable it is, and what its cash flow situation looks like. Furthermore, investors must research the company’s management team and see if they have a track record of success along with the industry the company operates in and see if it has room for growth.

Investment timeline

Unlisted shares and pre-IPO shares are typically illiquid investments, which means they cannot be easily bought or sold. Therefore, investors should have a long-term investment horizon and be willing to hold the shares for a while. This is because it may take time for the company to go public or for the shares to become traded. Investors should also consider their financial circumstances to ensure they’re not investing money they may need shortly.

Lock-in period

Pre-IPO shares are frequently subject to a lock-up period, which means the shares cannot be sold for a certain period after the IPO. This can range from a few months to a few years. Investors should understand the lock-up period and how it may affect their investment strategy. For example, if investors need the money from their investment in the short term, then investing in pre-IPO shares with a long lock-up period may not be suitable for them.

How to invest in unlisted or pre-IPO shares?

Through Angel Investing

Angel investing is the process of investing in early-stage startups in exchange for equity in the company. Angel investors are typically done by High Net Worth Individuals (HNIs) who are looking for high-risk, high-return investments. To participate in angel rounds, investors might join angel investing networks or platforms that connect them with startups. When investing in angel rounds, it’s important to do sufficient research and understand the risks associated with investing in early-stage businesses.

Through Venture Capital Funds 

Venture capital firms invest in startups and early-stage businesses. These companies often seek funding from institutional investors, such as pension funds and endowments. Investors can invest in venture capital funds that focus on investing in unlisted or pre-IPO shares. However, it is important to keep in mind that venture capital funds typically have high minimum investment amounts and long lock-up periods.

Off-the-market deals 

Unlisted shares can be bought through a Demat account and it is an off-market transaction (not on the exchange) between the buyer and seller. Hence it is very important to deal with reputable/trustworthy intermediaries to avoiding any counter-party risk.

Conclusion

Pre-IPO companies and unlisted shares make a very attractive investment option for investors as the growth potential and the return potential are quite high in such companies. However, such investment needs to be backed by detailed research of the companies to ensure the safety of the capital investment. Many investors shy away from investing in unlisted shares or pre-IPO companies as there is limited transparency and a lack of proper channels for necessary disclosures.