Can You Buy Private Company Stock?

The idea of owning a piece of a private company seems tantalizing, doesn’t it? Especially when you hear of success stories like Facebook or Uber, where early investors made huge fortunes. But here’s the catch: buying stock in a private company isn’t like walking into your stock brokerage account and clicking “buy” on Apple or Amazon. So, can you buy private company stock? Yes, but the process is quite different and often more complicated than buying shares of publicly traded companies. Let’s dive into how it works.

What Is a Private Company?

Before jumping into how you can buy private company stock, it’s essential to understand what a private company is. Unlike public companies that are listed on stock exchanges and have thousands of shareholders, private companies are held by a smaller group of investors, and their stock is not available for public trading. These can be small startups, mid-sized family-owned businesses, or even massive corporations like Cargill or Koch Industries that choose to remain private.

Private companies don’t have the same disclosure requirements as public companies. They don't have to file reports with the Securities and Exchange Commission (SEC) and thus are not under the same scrutiny. This can make investing in private companies riskier because you often have limited information compared to what you'd get with a public company. However, with greater risk comes the potential for greater reward.

How to Buy Private Company Stock

So, can you actually buy stock in a private company? Yes, but it’s not as simple as logging into a brokerage account and clicking a “Buy” button. Here’s a rundown of the ways you can get in on private company action:

1. Through Private Placements
   Private placements are one of the most common ways that investors can buy stock in private companies. In a private placement, a company sells shares directly to a small group of investors, typically institutions or accredited investors. Private placements often happen in the early stages of a company’s life cycle when it’s raising capital from venture capitalists or angel investors. These investors provide cash in exchange for equity in the company, taking on more risk in hopes of larger returns down the road.

   Accredited investors are individuals or entities that meet certain financial criteria set by the SEC. To qualify, you generally need a net worth of over $1 million (excluding the value of your primary residence) or have an annual income of at least $200,000 (or $300,000 with a spouse). This criterion helps ensure that only those who can afford to lose their investment are allowed to participate in private placements.

2. Through Employee Stock Options
   If you’re employed by a private company, there’s a chance that part of your compensation could come in the form of stock options. Startups, especially in tech, often offer stock options as an incentive to attract and retain talent. Employees who receive these options can buy shares in the company at a predetermined price, often below the company’s current valuation, once their options vest.

   This is a common pathway for non-accredited investors to get a stake in a private company. However, the big caveat here is that the stock options are not liquid. You won’t be able to sell them until the company goes public or is acquired.

3. Through Secondary Marketplaces
   Secondary marketplaces like Forge and EquityZen have made it easier for accredited investors to buy shares of private companies. These platforms allow early employees and investors to sell their shares to other accredited investors, providing liquidity for the seller and an investment opportunity for the buyer. Keep in mind, though, that these platforms still cater to accredited investors and typically require significant minimum investments.

   The secondary market is one of the few ways you can buy stock in highly sought-after private companies like SpaceX or Stripe before they go public. However, prices on these platforms can be much higher than they were during earlier rounds of fundraising, reflecting the increased value of the company.

4. Through Direct Negotiations
   In some cases, investors can negotiate directly with private company owners to purchase stock. This often happens when someone wants to acquire a large stake in the company, or when the company is looking for strategic investors. These deals usually involve a lot of legal work and due diligence and are typically reserved for institutional investors or high-net-worth individuals.

   Negotiating directly with company owners can be beneficial because you might be able to get better terms than in a formal fundraising round. However, it also involves more complexity, and without proper due diligence, you could end up making a poor investment.

Pros and Cons of Buying Private Company Stock

Now that you know how to buy stock in a private company, let’s weigh the pros and cons.

Pros:

• Potential for High Returns: If you invest early in a successful private company, your returns could be astronomical. Many early investors in companies like Uber, Airbnb, and Facebook saw their investments multiply by hundreds or thousands of times.
• Exclusive Opportunities: Private company investments aren’t available to everyone, which can mean access to unique opportunities.
• Diversification: Investing in private companies can offer diversification from traditional public markets.

Cons:

• Illiquidity: One of the biggest downsides to private company stock is the lack of liquidity. Unlike public stocks that you can sell whenever the market is open, private company stock is often locked up until there’s a liquidity event, such as an IPO or acquisition.
• Lack of Information: Private companies don’t have the same disclosure requirements as public companies, so you’ll likely have access to less information when making your investment decision.
• High Risk: Investing in private companies is risky. Most startups fail, and there’s no guarantee that you’ll see any return on your investment.

What Happens When a Private Company Goes Public?

One of the most exciting times for investors in a private company is when the company decides to go public through an Initial Public Offering (IPO). At this point, your private shares can convert into public shares, and you can sell them on the open market.

However, many companies impose lock-up periods on employees and early investors, preventing them from selling their shares for a set period, typically 180 days, after the IPO. This is done to prevent flooding the market with shares, which could drive down the price.

IPOs are also not guaranteed. Many private companies, like SpaceX, have chosen to remain private for an extended period, relying on private funding to fuel their growth. This can make it more challenging to access your capital if you’re an investor in such companies.

The Role of Regulation

The SEC heavily regulates the buying and selling of private company stock to protect investors. The primary rule in place is that only accredited investors are allowed to participate in most private offerings. However, with the passage of the JOBS Act in 2012, the SEC created pathways for crowdfunding, allowing non-accredited investors to participate in private equity deals through platforms like SeedInvest and Republic. These platforms let smaller investors buy into private companies, but the investments are often capped to limit exposure.

Conclusion

So, can you buy private company stock? Absolutely. But it’s not as straightforward as investing in publicly traded companies. You need to be prepared for the risks involved, including the potential lack of liquidity, the chance of losing your entire investment, and the complex regulations that govern private equity investments. On the flip side, investing in private companies offers the possibility of high rewards, especially if you get in early on the next big thing.

While buying private company stock may not be for everyone, those who are willing to take on the risks may find it to be a rewarding and potentially lucrative opportunity.