A New "Option" For Crowdfunding Profits

By Matthew Milner, on Friday, February 7, 2014

Ordinary folks who bought Twitter shares at the initial public offering did pretty well…

As of today, they’re sitting on gains of about 50%.

But investors who bought Twitter shares pre-IPO – when the company was still private, but on the train towards a public offering – made a fortune.

Given the profit potential of this pre-IPO strategy, it’s tempting to try it. We even wrote an article about it last year. >>

More recently, we came across a new service offering access to pre-IPO profits.

Perhaps you’ve heard about it. It’s been in the news this week, and our subscribers have been emailing us with questions.

Initially, we were intrigued – but we grew more and more cautious as we started looking under the hood.

Today we’re going to tell you about it…

And tell you why you should steer clear.

Dating for Dollars

The new service is called Equidate.

Equidate offers a way for ordinary investors to try and profit from pre-IPO shares.

Here’s how it works…

Let’s say I’m an employee of a pre-IPO company. I’ve worked there for years, and as part of my compensation plan, I’ve earned 100,000 shares of stock.

On paper, the stock has a value of $10 a share.

If my company IPOs in the future, the shares might be worth $25 or $50 each, maybe even more.

But a potential IPO doesn’t help me much today – my $1 million in stock doesn’t pay the mortgage or buy the groceries.

Now let’s say an investor like you is eager to own my shares. You think my company is the “next Twitter,” and you’re willing to pay handsomely for it.

Equidate is a marketplace. It acts as the middleman between us.  But there’s a catch – which I’ll explain in a moment.

Pre-IPO Marketplace… Take 2

Before Equidate arrived, other companies had tried setting up similar marketplaces.

Companies like SecondMarket, for example, matched employees (or ex-employees) who had big blocks of private stock with investors eager for the upside.

But these marketplaces never really blossomed…

First of all, they caused challenges for pre-IPO companies. These companies didn’t welcome the prospect of bringing new investors into the fold – investors they’d never met who’d now have access to sensitive information.

And secondly, they created headaches for the employees selling shares. Since their shares had legal restrictions, they couldn’t just sell them on SecondMarket as they pleased – they had to go ask their boss or CEO for permission. That’s awkward.

Equidate came up with a clever solution to these challenges…

A New “Option” for Profits

With their solution, no shares change hands between buyer and seller – so, theoretically, no issues exist about sensitive info, legalities, or permissions.

You give me $1 million in cash today – and I give you the proceeds of selling my shares at the IPO.

It’s like an options trade.

Why would I do this? Because for $1 million today, I might be willing to give up the potential for $2.5 or $5 million sometime in the future.

And since I haven’t actually “sold” my shares to you – you don’t own the shares, just the economic upside or downside – I don’t have to ask permission from my boss.

Too Clever By Half?

Sounds exciting, right?

Maybe…

But as a potential buyer, you can’t ignore the risks.

Not just the typical risks of a start-up or of pre-IPO shares – for example, the company doesn’t go public after all; or it goes public, but then drops like a rock before you can sell your shares…

But the risk of Equidate’s solution not working – or Equidate not staying in business.

The company is run by smarts folks, but it seems like they’re trying to get around existing securities rules.

Perhaps they’re being too clever about this.

If they run afoul of securities laws, they could get shut down.

Tread Carefully… or Just Steer Clear

So, despite the allure of big pre-IPO profits, we advise you to tread carefully…

In fact, for the time being, we advise you to steer clear.

If you missed the press about Equidate, here’s a good place to start >>

Best Regards,
Matthew Milner

Founder
Crowdability.com

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Tags: Twitter Investing Education Pre-IPO Late-stage Investing

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