Pre-IPO loans are a specialist product offered by the securities lending market. With few lenders operating in the market, those looking at securing finance under a pre-IPO loan can benefit from specialist advice, but here, we offer an insight into how the pre-IPO loans market works.
With many businesses and start-ups offering employees company equity before they achieve stock market listing, the pre-IPO (initial public offering) lending stream is in high demand.
If you own significant equity in a private company, to meet lending criteria, you’d traditionally require stock holding in a high-growth solid company who can demonstrate a high demand for their services or products. Once your company has announced its intention to list, you might consider taking out a pre-IPO loan. Even then, you may need help identifying the best lenders and assistance to present your case. Lenders typically proceed cautiously and apply different lending criteria making this a challenging endeavour if you have no previous experience in such matters. Therefore, you need to do your research, or have someone experienced on hand to advise.
Why Are They Popular?
High-tech, up and coming finance companies, trendsetting or ground-breaking businesses, market-leading firms or new generation “unicorn” firms can reach unlisted valuations of over $1billion. Choosing to source pre-IPO lending can be a good route to obtaining the financing you need to further develop the business and is a route also taken by a growing number of smaller companies.
Equity in up-and-coming firms can also open up lending opportunities in the pre-IPO market, as many companies are becoming highly desirable candidates for pre-IPO loans.
Growing valuations and potential future liquidity that can become a highly valuable security after your business goes public are of no value to secure lending before going public if you look only at mainstream lenders. Yet this can be just the time your business needs capital to achieve its intended market listing.
Pre-IPO loans work similarly to other securities backed lending, using your equity as collateral against the loan. However, they generally have more risk to lenders, include more constraints and are very much an individual lending decision for each borrower.
Points To Consider
- Listing timeframe – Often, lenders require listing to be expected within 12 months or for a business to have begun the process
- Independent share valuation -They will not use a company’s own valuation, and there may be a difference
- Stability and teams – Are the management team or critical business factors likely to change before listing.
- Loan to asset value – How much you want to borrow against your asset value
- Repayment terms and methods – How and when the loan will be repaid
- Legal considerations – Covenants, lock-up periods affecting share ownership and share transfer policies
Success or failure on lending decisions will be about how your risk level is perceived by the lenders approached and how your business case is presented. As such, it is clear that many factors make pre-IPO lending a specialist lending area, with many individual business factors to consider, which makes lenders cautious, of course, yet still approachable.