If you want to defy the usual laws of investing and put your money in private startups like SpaceX or OpenAI, it turns out that all you need is $5,000—and a serious appetite for risk.
Secondary marketplaces EquityZen and Forge Global just lowered their threshold for individual investors to invest in private companies from tens of thousands to just $5,000, the Wall Street Journal reported today. The two markets are also partnering with Yahoo Finance to provide data on about 100 private companies.
Is this really a good idea?
But just because you can do something, doesn’t mean you necessarily should.
The benefit of investing in private startups is obvious: Stakes in private companies can become incredibly lucrative as a startup grows. A lot of a company’s value is already squeezed out by the time it goes public, and firms are taking longer and longer to go public these days, leaving retail traders hungry for investment opportunities.
On the other hand, there’s a reason venture capitalists take a stake in so many different firms: A lot of startups fail. While the professional investors who traditionally have the opportunity to invest in private companies may be able to afford risk, most average investors aren’t in a position to gamble.
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In addition, while public companies report highly scrutinized quarterly earnings reports, the world of private markets is far murkier. It’s much harder to glean whether a company is set up to explode over the next few years, or flame out.
Just a couple of caveats
While investing on these platforms should make the process relatively accessible, it’s still not nearly as easy as using a regular brokerage platform.
For one, the option isn’t available to just anyone—individual investors need to earn at least $200,000 annually, or have a net worth over $1 million.
These investments are also illiquid: Investors are traditionally locked in for decades, and while EquityZen and Forge Global both promise to provide the liquidity needed to create a market for these private companies, they warn that it could take days to buy and sell shares. In addition, investors may be required to hold their investments for at least six months.
Finally, while most brokerages will make your trades with little to no commission, both platforms charge between 2% and 5% per transaction.
In other words, while investing in private companies may be an exciting opportunity, there are also plenty of perils and pitfalls to watch for.—LB