A pre-IPO loan is a particularly specialist product in the securities based lending market, and very few brokers or lenders operate in the space. As more startups and businesses offer equity to employees before listing, this type of finance is increasingly sought-after, however.
Lenders will generally consider offering you a pre-IPO loan if you have equity in a highly valuable, growing company that is planning to list in the short to medium term. While equity in such companies can become highly valuable after the IPO, future liquidity and growing valuations are of little help if you need access to capital before the business goes public. It’s for this reason that pre-IPO loans are becoming more common.
Pre-IPO loans are a very niche area of the securities backed lending market. In theory, anyone with significant equity in a private company that has announced its intention to list can explore taking out a pre-IPO loan. However, lenders will tread with extreme caution for this type of financing, even if you own equity in a very stable company.
Generally, to benefit from this specialist type of financing, lenders will consider lending against stocks in very solid, high growth companies with in-demand products or services. There’s no hard and fast rule as to which industries or company profiles lenders will be prepared to consider pre-IPO lending against. However, if you own equity in something like an up-and-coming tech or finance company, market-leading firm, or “unicorn,” you are likely a highly desirable candidate for a pre-IPO loan.
Lenders may consider you if your circumstances or situation are different, or if your equity is in a smaller company, but expect the lending process to be more complex.
At a basic level, this type of financing works in much the same way as straightforward securities backed lending does. Your equity will be used as collateral by a lender who offers you a credit line in return.
It’s here that pre-IPO loans diverge from their plain vanilla counterparts in other areas of the securities backed loan market. Pre-IPO loans are very complex because there’s a lot more constraints and risk than, say, using a diverse portfolio of high-volume stocks listed on major exchanges as collateral for a loan. There are lots of different angles to consider, but some of the main points lenders will contemplate will be:
Pre-IPO stock loans are offered on a truly case-by-case basis. Most lenders will likely prefer lending to shareholders whose businesses have publicly announced that they intend to list within the next 12 months or have already started the IPO process.
Overall, this type of transaction can carry a high level of risk for both lenders and borrowers. Lenders may offset this by offering low loan-to-value ratios and seeking a portion of the upside of the share value post IPO. For your part, remember that taking a company public always carries risk: there is a chance that your equity will lose value after the IPO. Understanding the risks, having access to partners who can guide you through complexities and having a firm grip on the conditions and details of any loan you are offered will be critical to success. Many borrowers navigate this type of lending very successfully, but they are very rarely, if ever, operating alone. Working with partners like Enness will make the process easier and faster. You’ll get the best finance and terms for your situation.
Any transaction which involves using pre-IPO shares will need to be carefully constructed. For example, there are usually covenants and policies that will dictate what you are allowed to do with your equity.
In particular, there may be restrictions on shares being transferred (as will need to be the case if they are used as security). If there is a margin call or you can’t keep up with payments and defaults on the loan, the lender can move to sell or take over ownership of the position, effectively triggering a permanent transfer of shares. Share transfers can be a real challenge for this type of stock - especially if that were to happen before the company goes public. All these elements - and more - will need to be considered before Enness can even approach lenders for you.
Enness will start by listening to your situation, financing needs, and understanding your broader ambitions. At this point, the team will also ask for more details about your equity and how it’s structured.
It’s essential to cover the fine details early in this kind of transaction as they can have a significant bearing on what comes next. Lenders will want to know the particulars of your equity before they consider you for a loan. Likewise, there is no point approaching lenders only for it later to transpire that you have specific restrictions that mean you can’t use your equity as security for this type of financing.
If, for any reason, your equity doesn’t make you a good fit for this type of loan, Enness will look at your situation and assess if there are other financing options available. As experts in different kinds of financing and with decades of experience in the finance industry, the team may well be able to identify workable alternative solutions or opportunities for you.
If a pre-IPO stock loan is a possibility, it will need to be carefully negotiated to ensure you get the best possible deal. Especially in this area of securities financing, the devil is in the detail. Enness’ team will go over the details and your needs with a fine-tooth comb to understand what the best deal will look like. Taxes, terms, price, loan-to-value ratio and how much of the upside of the share value you are willing to give up will all come into play. Sometimes, a slightly more expensive loan with more favourable terms is a better option than the ‘cheapest’ offer.
Pre-IPO loans are complex, and it’s nearly impossible to navigate the market successfully alone. Lenders are few and far between, and you are unlikely to know all the players in the space, let alone be able to contact decision-makers directly.
Contact Enness to learn more to have an informal and no-obligation chat about pre-IPO loans and if it could be a good solution for you.