Pre-IPO due diligence checklist
Key takeaways
- Buying private shares involves checks that do not exist on a public exchange.
- The ten questions cover rights, restrictions, price, fees, information, tax and exit.
- Errors in transfer mechanics can leave a buyer with fewer rights than expected.
Buying shares of a private company involves checks that do not exist on a public exchange. The following ten questions are a practical starting point for qualified investors and their advisers.
The ten questions
- Which share class is being sold, and what rights does it carry compared with preferred shares?
- Does the seller hold the shares directly, and is the seller authorized to transfer them?
- What do the company's bylaws and shareholder agreements say about transfers, and is board approval required?
- Does a right of first refusal or co-sale right apply, and has it been waived in writing?
- How does the price compare with the most recent priced funding round and with recent secondary transactions?
- What liquidation preferences sit above the class being bought, and how would they affect proceeds in a sale?
- Is the exposure direct or held through an SPV or fund, and what fees and carried interest apply at each layer?
- What information will the buyer receive after closing, such as financial statements and cap table updates?
- What are the tax and regulatory consequences in the investor's jurisdiction, including investor qualification rules?
- What is the expected exit path, an IPO or a strategic sale, and how would lock-up periods affect liquidity?
Why specialized execution matters
Identifying genuine sellers, negotiating terms and structuring the agreement each require specific expertise. Errors at any step can invalidate a transfer or leave the buyer with fewer rights than expected.
Related guides
- Secondary transactions and right of first refusal (ROFR)
- SPV vs direct purchase vs fund in pre-IPO investing
- How to value a private unicorn