Sell your pre-IPO stock to diversify your net worth and reduce risk
October 18, 2022

Sell your pre-IPO stock to diversify your net worth and reduce risk

Jake Safane
Key Takeaways
  • Startup equity can be a large part of your net worth
  • While you believe your company will have a successful IPO, delays and setbacks do happen
  • Consider selling a portion of your vested equity pre-IPO to hedge against negative economic events

Receiving equity as part of your compensation package at a privately held company, especially a hot startup, can feel like winning the lottery. As the company grows, it usually raises money at an increasing valuation with an eye to going public via an IPO. Recently, Figma, the design collaboration startup, was recently acquired by Adobe for $20 billion representing a nearly 100% increase from Figma’s last primary financing round just last year. That was on top of a 5x increase in Figma’s value from 2019 to 2021. Although not an IPO, this acquisition proved to be a successful exit for the company.

But sometimes startup companies lose value which can negatively affect your financial well-being. Unfavorable macro-economic conditions can create significant headwinds to a company’s growth. Last March, the grocery delivery giant Instacart took the step of slashing its own value by 40% to $24 billion. A few months later, several of their key investors announced they had further reduced the company’s value to $14.7 billion constituting a 62% drop from their $39 billion valuation in February 2021. In May, Instacart announced that it had confidentially filed for an IPO.

Understanding how your startup equity figures in your overall net worth is important and can help you make smarter financial decisions.

Startup Equity as a component of your overall net worth

Let’s take a look at a hypothetical example of a startup employee’s net worth. Meet Taylor. Taylor has worked for five years as an engineer at a successful SaaS startup. She owns a home, contributes to her 401k and puts a little money every month into a portfolio of publicly traded stocks. But the overwhelming bulk of Taylor’s net worth is comprised of the equity she has earned as part of her compensation. Her company is still private but when it goes public via an IPO, she knows she’ll be able to sell the stock for a big gain. Taylor is feeling pretty good about her financial health.

Diversify as a way to reduce risk

Meet Ryan. Ryan has worked five years at the same privately held company as Taylor. Ryan felt confident about her company’s IPO prospects but didn’t want to put all her eggs in one basket when it came to her financial health. She chose to sell 50% of her vested stock on the secondary market and use the proceeds to diversify her net worth. She added funds to her 401k and stock portfolio, and put a chunk into savings for a rainy day. She also invested some of the proceeds into several other promising startups via the secondary market. Ryan’s net worth is the same as Taylor’s, in this example, but is balanced across investment types.

Negative Market Conditions & Down Rounds

But now, let’s introduce a downturn into this scenario. Taylor and Ryan’s company begins to struggle in an increasingly challenging market. Her company needs to raise money quickly to ride out a downturn and conducts a primary financing round at a significantly reduced valuation.

Because Taylor’s net worth was made up mostly of her startup equity, she has lost $1.6 million in value, over 60% of her net worth. Taylor is obviously disappointed. But she doesn’t control the valuation of her company’s stock, so there was nothing she could have done. Or was there?

Let’s take a look at Ryan’s net worth during the same downturn. Ryan’s equity also suffers a significant loss and impacts her net worth. But because she had diversified, Ryan’s loss was limited to $800,000 leaving her net worth at $1.7 million versus Taylor’s resulting net worth of $935,000.

Now, of course the above is only a hypothetical example of a downturn. It’s possible of course for the company value to increase which would benefit Taylor who kept her large position in the stock. In this case, Ryan would have less upside potential. In a downturn, other asset types may also be negatively affected – stock portfolio, 401ks, real estate. It’s also important to point out that the above represents net worth and not liquid net worth. There are costs associated with liquidating any asset class (except for cash). Just like there are fees and commissions to sell your house, there are costs associated with liquidating private and public securities. For private securities, there is no guarantee that you can find a buyer and, in some cases, your company’s policy may place restrictions on stock sales.

How Forge can help you sell private company stock

If you’re interested in diversifying, Forge, the leading secondary market platform, can help you understand the current value of your private stock so you can get a sense of how much of your equity, if any, you want to sell. If you decide to sell, we work to connect you with our network of more than 125,000 accredited investors and institutions who may be interested in buying your stock. To learn more about selling your private company stock, please see our blog “Can you sell shares in a private company before an IPO."

If you’re ready to get started listing your shares, create a free account on our platform today to see what your shares might be worth.

About the author: Jake Safane specializes in financial reporting and is a former thought leadership editor for The Economist with articles appearing in Business Insider and The Washington Post among other media outlets.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.

This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities LLC do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services. Securities referenced in this article may be offered by Forge Securities LLC, member FINRA/SIPC.

Forge Securities LLC is a wholly owned subsidiary of Forge Global, Inc. Certain affiliates may act as principals in such transactions. Forge Data LLC is an affiliate of Forge Global, Inc. and Forge Securities LLC.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

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PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.

This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities LLC do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services. Securities referenced in this article may be offered by Forge Securities LLC, member FINRA/SIPC.

Forge Securities LLC is a wholly owned subsidiary of Forge Global, Inc. Certain affiliates may act as principals in such transactions. Forge Data LLC is an affiliate of Forge Global, Inc. and Forge Securities LLC.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.