Should I invest in the pre-IPO company stock offered by my employer?

Question

Should I invest money in the pre-IPO stocks soon to be offered by the company that I work for?

Is it wise to do this? What should I be thinking about? What are the risks?

I'm one of the first employees, hired in October 2013. The company is a startup in high technology, in the Silicon Valley, and filed S-1 with the SEC for IPO in February. I also have stock options.

Friends and family can purchase pre-IPO stock.

The company has a highly experienced and successful management team, a product that has extreme potential, and already has large companies interested in investment. They're presently demonstrating the product to potential investors and customers.

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Ok, it's now a year later. March 28, 2014 IPO cost per share was $6. Out of the chute, stock zoomed up 100%. It's now still 50% above IPO cost.

Best news is that we have a signed 1st tier electronics company, cash, talent, and we're in the wireless power uncoupled market.

So, I'm glad I bought.

Answer 1

Should I invest money in the pre-IPO stocks soon to be offered by the company that I work for?

Is it wise to do this? What should I be thinking about? What are the risks?

The last time I was offered pre-IPO friends and family stock, I purchased half of my allotment, and had my parents purchase the other half.

Since I had a 6-month blackout period, I had to hold my portion. My parents sold their portion one day after the IPO.

The price went up dramatically for about a day and a half, then dived continuously.

My portion ended up being worthless. My parents made a few bucks. Good for them.

Not a huge deal either way, since my cost was relatively low. If I had a chance to do it again, I'd give it all to friends or family instead of splitting it, and have them sell quickly if they realized a profit.

You might be luckier than I was.

Answer 2

Depending on your perspective of it, I can see reasons for and against this idea.

Only with the benefit of hindsight can one say how wise or unwise it is to do so. Earlier in my career, I invested and lost it all. Understand if you do buy when would you be able to sell, do you have to have an account with the underwriter, what fees may there be in having such an account, and would there be restrictions on when you could sell.

Answer 3

Whether it's wise or not depends on what you think and what you should consider are the risks both ways.

What are the risks?

For

Let's say that the company produces great value and its current price and initial price are well below what it's worth. By investing some of your money in the company, you can take advantage of this value and capitalize off of it if the market recognizes this value too, or when the market does (if it's a successful company it will be a matter of when).

Other reasons to be for it are that the tech industry is considered a solid industry and a lot of money is flowing into it. Therefore, if this assumption is correct, you may assume that your job is safe even if your investment doesn't pay off (meaning, you don't lose income, but your investment may not be a great move).

Against

Let's say that you dump a lot of money into your company and invest in the stock. You're being paid by the company, you're taking some of that money and investing it in the company, meaning that, depending on how much you make outside the company, you are increasing your risk of loss if something negative happens to the company (ie: it fails).

Other reasons to be against it are just the opposite as above: due to the NSA, some analysts (like Mish, ZeroHedge, and others) think that the world will cut back on doing IT business with the United States, thus the tech industry will take a major hit over the next decade. In addition to that, Jesse Colombo (@TheBubbleBubble) on Twitter is predicting that there's another tech bubble and it will make a mess when it pops (to be fair to Colombo, he was one of analysts who predicted the housing bubble and his predictions on trading are often right).

Finally, there is a risk of lost money and there is also a risk of lost opportunity. Looking at your past investments, which generally hurt more? That might give you a clue what to do.