How to invest in private companies: Requirements, strategies and risks

Private market investing continues to gain traction as more investors seek access to innovative and potentially high-growth companies before they go public. While institutional investors and venture capitalists have long participated in this space, platforms like Forge are helping democratize access to the private market. This article outlines requirements, potential strategies and risks associated with investing in private companies.

Who can invest in private companies? Understanding accredited investor requirements

Generally, private company shares are only available to accredited investors. Although there are multiple criteria that the U.S. Securities and Exchange Commission (SEC) uses to define an accredited investor, the most commonly used criteria are as follows:

• Has an individual income exceeding $200,000 (or $300,000 jointly with a spouse or partner) for each of the last two years, with a reasonable expectation of maintaining the same income level in the current year.
• Has a net worth exceeding $1 million, either individually or jointly with a spouse or partner, excluding the value of their primary residence. 
• Holds certain investment professional certifications (a Series 7, Series 65, or Series 82 license), designations or credentials.

Minimum investment: What to expect with Forge

Forge strives to increase the accessibility of private market investing, while complying with regulatory standards. Understanding our minimum investment requirements is important, whether you are an experienced investor or new to exploring alternative assets.

In many cases, a single-company Forge fund offering may accept transactions as low as $5,000. For other transactions like direct trades, a company may require higher minimums in order to approve the addition of a new investor to their cap table – these transaction minimums typically start at $100,000, though amounts as low as $5,000 may be considered.

Please note that, while purchases at lower dollar values may be available in some cases, these transactions tend to be very limited and may only be available through a single-company Forge fund offering.

It’s important to note that there is a difference between a direct investment in a private company and a Forge fund offering.

A direct investment involves buying shares directly from a stockholder or from the company itself. At its core, a single-company Forge fund offering is a formal listing of shares in a private company that is available for potential purchase. It’s initiated by a shareholder, company or potentially a previous investor that is looking for liquidity and Forge regularly facilitates the formal establishment of funds on their behalf. In a fund investment, the investor does not directly own or hold shares of the private company but owns fund units, which in turn gives the investor indirect exposure to the shares of the privately held company.

Learn how to buy shares through Forge via our Buyer’s Guide [here].

Strategic considerations when evaluating private market investments

Although Forge does not offer investment advice, the following are several strategic considerations to keep in mind when evaluating opportunities in the private market.

Before selecting any private investment, it’s essential to establish a clear investment thesis. Are you seeking exposure to a specific sector like fintech or artificial intelligence (AI)? Are you aiming to invest in early-stage startups with high growth potential or more mature private companies nearing a liquidity event such as an IPO or acquisition? Defining your thesis helps narrow your focus and align opportunities with your financial goals, risk tolerance and time horizon.

Information asymmetry is a hallmark of the private market. Unlike publicly traded companies, private companies are not required to disclose financials or business performance publicly. Investors should dig into a company’s fundamentals, including revenue growth, burn rate, customer base, leadership team and market positioning. Requesting investor decks, capitalization tables (cap tables) and financial statements—when available—can help provide critical insight into a company’s viability and trajectory.

Understanding a company’s cap table is vital. It outlines who owns what portion of the company and can reveal whether existing investors are doubling down on their stakes or whether founders have experienced excessive dilution. A clean, balanced cap table can indicate prudent capital management, while a messy or overly complex structure might signal potential conflicts or challenges down the road.

Valuation matters—especially in the private market where pricing can sometimes be opaque. Investors should assess whether the proposed entry valuation reflects the company's fundamentals and comparable deals in the market. Just as important is mapping out the potential exit paths: Will the company go public? Is it a candidate for acquisition? Does it regularly conduct secondary transactions through platforms like Forge that could offer interim liquidity?

Private market investments have inherent risk, and diversification can help mitigate that risk. Consider allocating capital across a mix of early-, growth-, and late-stage companies, as well as different industries and geographic markets. This approach may increase the odds that at least a portion of your portfolio could generate positive returns, even if some investments underperform or fail.

For individuals who want access to private companies without having to source and vet each direct trade opportunity directly, special purpose vehicles (SPVs) - the investment vehicle that Forge labels as Forge fund offerings - offer a way to pool capital with other investors. These vehicles are often professionally managed and can provide access to curated deal flow, helping reduce risk through structured oversight and shared diligence.

Private company investments are typically less liquid and longer-term than public securities, but that doesn’t mean you should set and forget them. Track company milestones, industry trends and macroeconomic factors that could influence performance or valuation. In cases where secondary market opportunities arise, you may also consider rebalancing your portfolio or take partial liquidity, depending on your goals.

Ultimately, private company investing has the potential to reward those who are methodical, informed and patient. By approaching each opportunity with a strategic lens and a strong grasp of market dynamics, investors can better position themselves to capitalize on the long-term potential of the private market.

Investing in private companies through a self-directed individual retirement account (SDIRA)

For those looking to diversify their retirement portfolios with private market investments, Forge Trust offers a unique path to this opportunity by enabling qualified investors to use self-directed individual retirement accounts (SDIRAs) to invest. The following are some of the potential benefits that SDIRA investors may take advantage of:

Owners of SDIRAs make their own decisions about which investments to make. They can choose which private equity investments they want to make, depending on what is currently being offered by companies or employees.

In many cases, investments in private companies only achieve a liquidity event when the company engages in an IPO or is acquired. Some private companies could take years or decades to exit, which makes them a promising long-term investment that benefits from tax advantages associated with IRA plans.

Investors interested in portfolio diversification will find more options in SDIRAs than in standard ones. That’s because private equity is among several other investments not available in standard IRAs.

Private company investments offer the potential for higher returns but with greater risk. Private company exits through IPOs or acquisitions could produce significant gains. However, the company could also close down without an exit and investors may lose their investment. Many Individuals should seek investment advice from a licensed professional before investing.

Potential risks when investing in private securities

Investing in the private market comes with a unique set of risks and considerations that are important to understand before getting started. Unlike publicly traded shares, private shares are not listed on stock exchanges, making them subject to limited regulatory oversight, less liquid, less transparent and more difficult to value.

Liquidity is a key concern in the private market. Private companies often have the right to prohibit any trading of their shares entirely. Even if trading of the company’s shares are permitted, trades are also typically subject to a right of first refusal (ROFR) held by either the company or significant stockholders; a ROFR means that in any proposed sale, the company or the significant stockholder can step in as the purchaser after exercising their ROFR within a certain time period (typically between 15-60 days). Unlike public markets, where investors can buy or sell shares in seconds, private market investments also may require holding periods of several years—or longer—before a liquidity event such as an acquisition or IPO provides a path to cash out. Secondary markets like Forge help address this challenge by connecting buyers and sellers, but it’s still important for investors to be prepared for a longer investment horizon and take heed of the fact that private share transactions often take a longer amount of time compared to public securities.

Higher risk of potential failure. While both private and public companies face the risk of failure, private companies generally experience a higher failure rate. This is often attributed to limited access to capital, as private companies rely on a smaller pool of investors compared to public companies, which can raise capital through stock offerings. In addition, private companies may have less access to diverse expertise and resources compared to public companies.

Valuation and pricing can also be more complex. Without a daily market price, private shares are typically valued based on recent funding rounds, 409A valuations or secondary market transactions. This means prices may not always reflect real-time changes in a company’s performance or risk profile. Investors should be aware that valuations can fluctuate significantly and may be impacted by broader market conditions or internal company developments.

Transparency can be limited in the private market compared to public companies, which are required to disclose financials, risk factors and strategic plans. Private companies are under no such obligation. As a result, investors may have less access to detailed or current information, making it harder to fully evaluate the health and prospects of a business.

Final thoughts

Investing in private companies can potentially be a rewarding endeavor, offering early access to some of tomorrow’s leading innovative companies. However, it requires a higher tolerance for risk, patience and diligence as you proceed. It’s recommended that one consults a financial advisor and conducts personal research before committing capital to private investments. For investors willing to navigate these complexities, platforms like Forge offer the tools, transparency and access necessary to make more informed investments in the private market.

Ready to explore the future of investing? Open your Forge account today and take your first step into the private market.