The idea of investing in a company before it hits the public market has a certain appeal. For investors, it’s a chance to get in early—possibly before the hype drives up valuations. For employees or founders, selling pre-IPO stock might mean unlocking real value from years of hard work. But while the potential rewards can be high, the risks, rules, and fine print are just as real. Before you buy in or cash out, there are a few key things you need to understand. Let’s take a look at them.
What Entrepreneurs Should Understand About the Road to IPO
Not every business is built for a public exit, and for founders, the road to IPO can be longer, more expensive, and more complex than expected. It’s not just about raising funds or hitting a revenue milestone. Going public involves regulatory hurdles, increased scrutiny, and the pressure to meet quarterly expectations from shareholders who weren’t there for the startup’s early struggles.
For anyone holding equity in a startup—whether you’re an early employee, an advisor, or an investor—it’s worth remembering that the journey from Series A to an IPO filing can take several years. Even then, success isn’t guaranteed. Some companies postpone or cancel their IPO plans entirely, choosing to remain private or explore acquisitions instead.
This matters if you’re banking on liquidity through a public offering. If the business isn’t quite there yet, your exit may take longer than expected.
Where to Find Pre IPO Stock—and Is It Worth the Risk?
Buying pre-IPO stock used to be a game reserved for venture capital firms, insider networks, or employees with generous equity packages. These days, though, more investors are gaining access through alternative marketplaces that specialize in private equity. These platforms create a path for individuals to buy shares in startups that are still private, sometimes by purchasing equity from early employees or other investors.
While it’s exciting to think about getting in before a company becomes a household name, you have to weigh that excitement against the risks. Startups are, by nature, volatile. Some never make it. Others take longer than expected to mature. And even if the business is solid, your ability to cash out might be limited by transfer restrictions or shareholder agreements.
The Rules Around Selling Pre-IPO Shares
If you’re on the other side of the equation—say you’re an early employee or angel investor looking to sell—things can get tricky. Pre-IPO stock is often subject to transfer restrictions. That means you can’t just list your shares online or call up a buyer and cash out. You may need approval from the company, or the right to sell might be limited to certain windows.
On top of that, some companies require buyers to be accredited investors or have specific qualifications before they can purchase shares. And then there’s the matter of valuation. Private shares don’t always have a clear market price, so figuring out what your stock is worth—and what someone will actually pay for it—requires negotiation and sometimes patience.
Taxes and Pre-IPO Stock
This is where things can get complicated fast. Whether you’re buying or selling, pre-IPO stock usually comes with tax considerations that go beyond a simple capital gains calculation. For employees, stock options might trigger a tax bill at the time of exercise—even before a sale happens. For early investors, selling stock before an IPO could mean short-term gains, which are taxed at a higher rate.
There’s also the Alternative Minimum Tax (AMT) to think about, particularly for incentive stock options. Many shareholders have been caught off guard by unexpected tax bills because they didn’t plan properly around stock transactions or holding periods.
What Happens After the IPO
Let’s say the IPO happens. Congrats, your stock is finally liquid. Now comes the decision: do you hold or sell? This is one of those classic dilemmas that can trip up even experienced investors. On one hand, holding means you might benefit from future growth if the stock takes off. On the other hand, IPOs are often followed by volatility, and many newly public companies face a bumpy first year on the market.
Another factor to consider is the lock-up period. Even after the IPO, insiders are usually restricted from selling their shares for a set number of months. When that window opens, there’s often a flood of sales, which can drive the price down temporarily. If you’re planning to sell, you’ll need to watch the timing carefully.
