Pre-IPO investing: what to know before you buy

A pre-IPO investment is simply a purchase of unlisted shares in a company that is expected to list. The appeal is obvious: if the IPO is priced above what you paid, you are sitting on a gain from day one. The details are where investors get caught out.

The lock-in

Shareholders who held shares before an IPO are usually locked in for six months from the date of allotment in the IPO. During that period you cannot sell on the exchange, even if the stock lists at a big premium. Plan on holding through at least that window.

IPO price versus your buy price

Your return depends on three prices:

1. What you paid in the unlisted market
2. The IPO price set by the company and its bankers
3. Where the stock trades when your lock-in ends

It is entirely possible for the IPO to be priced below your purchase price, or for the stock to fall between listing day and the end of your lock-in. Use the Pre-IPO calculator to see how these interact for your position.

Timing risk

Companies postpone IPOs for many reasons: weak markets, regulatory observations on their offer document, or simply a decision to raise private capital instead. "IPO expected next year" is an intention, not a date.

What to check before buying

• Has an offer document been filed? A draft prospectus is a strong signal of intent and contains a wealth of information. See our explainer on DRHPs.
• Recent funding rounds. How does your price compare with the most recent round?
• Financial trajectory. Growth, margins and cash burn over three years.
• Share capital changes. Bonus issues or splits before an IPO change your share count; your value should be unchanged, but make sure you understand the adjustment.

Position sizing

Because you cannot exit quickly, keep any single pre-IPO position to an amount you would be comfortable leaving untouched for two to three years.

Pre-IPO investing rewards patience and homework. Use the fundamentals and documents on each Finlaunch product page, and talk to a specialist before you commit.