Buying shares in employer's company during IPO

Question

So the company that I work for has just put out an IPO to float on the share market. They have offered employee's the opportunity to purchase reserved shares before the offer goes public, up to $10 million worth of shares total. The minimum amount to purchase is $2000 which is probably the amount that I'd be investing. The Indicative Price Range is expected to be between $1.20 – $1.38AUD.

I have read the prospectus, and they are saying that they expect between 4.6% – 5.3% dividend yield which seems pretty decent. I'm just hesitant because I work for them. While I am confidant that the stock isn't going to immediately tank, the fact that each majority stock holders (board members) are reducing their holdings by half using the IPO is worrying me, even though the stocks are held in escrow until EOFY 2016. I've never brought shares before so I want to make sure that I do this right. Are my worries justified, or should I just invest given that I am confident in the companies direction?

_{Obviously this isn't going to be considered actual financial advice, I'm not going to hold answerer's culpable for any losses. I mean.... I'm asking the internet for financial advice.}

Answer 1

I think of these things in terms of risk.

Investing in individual stocks is risky, and investing in brand new individual stocks is riskier still. However, the payoff can be quite high.

The fact that you work at the company increases your exposure. If the company goes under, then not only have you lost your investment, but you've lost your job and income as well.

It really depends on how much of your total portfolio this investment represents. Consider the following:

• Do you have a good, diversified start on your retirement savings?
• Do you have a good emergency fund built up that can hold you over if you lose your job?
• Do you think you would have an easy time getting another job?
• Are you debt free, or is your debt under control?

If you can say yes to all or most of these, then a small investment in your company is fine. If you end up losing your investment, you'll still be okay.

I think it can help a company when the employees have a little skin in the game. I hope it pays out big for you.

Answer 2

Rather than take anyone's word for it (including and especially mine) you need to do think very carefully about your company; you know it far better than almost anyone else. Do you feel that the company values its employees? If it values you and your immediate colleagues then its likely that it not only values its other employees but also its customers which is a sign that it will do well. Does the company have a good relationship with its customers? Since you are a software engineer using a web stack I assume that it is either a web consultancy or has an e-commerce side to it so you will have some exposure to what the customers complain about, either in terms of bugs or UX difficulties. You probably even get bug reports that tell you what customer pain points are. Are customers' concerns valid, serious and damaging? If they are then you should think twice about taking up the offer, if not then you may well be fine. Also bear in mind how much profit is made on each item of product and how many you can possibly sell - you need to be able to sell items that have been produced.

Those factors indicate how the future of the company looks currently, next you need to think about why the IPO is needed. IPOs and other share offerings are generally done to raise capital for the firm so is your company raising money to invest for the future or to cover losses and cashflow shortfalls? Are you being paid on time and without issues? Do you get all of the equipment and hiring positions that you want or is money always a limiting factor? As an insider you have a better chance to analyse these things than outsiders as they effect your day-to-day work.

Remember that anything in the prospectus is just marketing spiel; expecting a 4.5 - 5.3% div yield is not the same as actually paying it or guaranteeing it. Do you think that they could afford to pay it? The company is trying to sell these shares for the maximum price they can get, don't fall for the hyped up sales pitch.

If you feel that all of these factors are positive then you should buy as much as you can, hopefully far more than the minimum, as it seems like the company is a strong, growing concern. If you have any concerns from thinking about these factors then you probably shouldn't buy any (unless you are getting a discount but that's a different set of considerations) as your money would be better utilized elsewhere.

Answer 3

So the key factor here, IMHO, is the amount we are talking about. $2K is just not a lot of money. If you lose every penny, you can recover. On the other hand it is unlikely to make you wealthy. So if I was you I would buy in, more for the fun of it all.

Now if it was a large amount of money that we were talking about it would be about a percentage of my net worth. For example, lets say the minimum was 20K, and you really believed in the company. If I had a net worth of less than 200K, I would not do it. If I had a larger net worth, I would consider it unless I was near retirement.

So if I was 30, hand a net worth of 300K, I would probably invest as even if I did lose it all, I could recover.

Having said all that it does not sound like you completely agree that the company will be profitable. So in that case, don't buy.

Also, I have the opportunity to buy my own company's stock at a discount. However, I do not for two reasons. The first is I don't like investing in the company I work for. Secondly, they require you to hold the stock for a year.

Answer 4

its the best investment you can have specially with the company you work for and IPO, if i was you i would invest in more then just the minimum since its IPO. ask you your manager or supervisor how much are they buying the stocks for if they are doing it the go for it you'll be okay just keep track of it regular sometime you can invest more as time go by. You can get the idea by how much production your company is doing, if your company's profit going up chances are you need to buy more.