IPO Friends and Family Offering

[iamlindoro]

A family member works for a company which has filed for a somewhat anticipated IPO.  The family member contacted me and asked about my interest in a Friends and Family purchase of shares at the offering price.  Due to the relative high likelihood of this offering being successful (company is in a hot sector, shows large revenue growth over the past few years, and has a good amount of buzz surrounding the filing), I let him know that I am indeed interested.  The level at which I would be allowed to participate is still TBD-- I have a number in mind that I am thinking to put into it, but I may or may not be able to buy that much depending on the IPO bank.

My current stock investments are all index funds.  I have a three fund portfolio that matches my IPS, and I'm very happy with it.  I don't intend to make single stock purchases a habit, and I would only put spending money that I could live with losing entirely into this.  I won't be robbing Peter to pay Paul-- that is to say, I won't reduce my contributions to my established investments to "find" the money for this.  I don't want to get too specific about the IPO terms, but the lockup is very favorable to friends and family-- think little to none.

Initial thoughts are to put $X in, and set a limit order to sell half the shares at about (x * 2).  Get my own funds out, and then play with house money. 

Thoughts on Friends and Family shares, the above strategy, or anything else that comes to mind?

[This_Is_My_Username]

I did the same thing.  All my money is in index funds, but I participated in an IPO.

One thing you might want to consider, is to hold on to them until after FIRE.  Then you can sell them at a lower capital gains tax rate (depending on your contry's tax rules).

But, will the company still be going strong in 10+ years?

[Scandium]

Was thinking it might be a tech IPO, but then you said they have revenue.

[innerscorecard]

Was thinking it might be a tech IPO, but then you said they have revenue.

Compared to the dot-com bubble, tech IPOs these days usually have revenue. A lot just don't have profits yet from that revenue.

[iamlindoro]

Was thinking it might be a tech IPO, but then you said they have revenue.

Compared to the dot-com bubble, tech IPOs these days usually have revenue. A lot just don't have profits yet from that revenue.

Indeed, you're both spot on-- it's a tech company, in a space that I understand (I have done a lot of work in this space), and they are still operating at a loss (though the gap is quickly dwindling).

It's precisely because of the riskiness of this kind of move that I would only play with an amount that I could stomach losing entirely.  I don't *think* that's will happen, but plan to play it somewhat conservatively regardless.

[innerscorecard]

If you feel you are able to buy this stock with an amount of understanding and analysis that makes it an investment decision, just buy it. I see in your language a lot of apologetic wording, as if you're committing some kind of grave indiscretion by daring to buy an individual security instead of indexing 100%. You go so far as to say that you will try not to do it again. Just this once, you're saying!

There's no need to feel like that. You won't be barred from heaven by daring to buy an individual security! Even A Random Walk Down Wall Street or Bogle say that it's totally fine to buy individual securities with a small portion of your money.

The real danger would come from hopping in and out of index funds or individual stocks and changing your general strategy on a whim. Don't do that. But you shouldn't feel some huge sense of guilt, as I sense it, by buying a stock that you feel you understand.

Of course, you need to make sure you actually have an investment-level understanding of the company. That means not just buying Tesla, for example, because "Elon Musk is a genius and electric cars are the way of the future."

Have you read the company's IPO prospectus in full? Do you understand it on a basic level? Do the price and terms appear to be reasonable? That is the absolute minimum level of understanding you should have. Of course you could always do more, like make your own model of the company's growth and prospectus, as well as make some calls around industry contacts to try to understand industry dynamics for this company.

[iamlindoro]

If you feel you are able to buy this stock with an amount of understanding and analysis that makes it an investment decision, just buy it. I see in your language a lot of apologetic wording, as if you're committing some kind of grave indiscretion by daring to buy an individual security instead of indexing 100%. You go so far as to say that you will try not to do it again. Just this once, you're saying!

There's no need to feel like that. You won't be barred from heaven by daring to buy an individual security! Even A Random Walk Down Wall Street or Bogle say that it's totally fine to buy individual securities with a small portion of your money.

The real danger would come from hopping in and out of index funds or individual stocks and changing your general strategy on a whim. Don't do that. But you shouldn't feel some huge sense of guilt, as I sense it, by buying a stock that you feel you understand.

Of course, you need to make sure you actually have an investment-level understanding of the company. That means not just buying Tesla, for example, because "Elon Musk is a genius and electric cars are the way of the future."

Have you read the company's IPO prospectus in full? Do you understand it on a basic level? Do the price and terms appear to be reasonable? That is the absolute minimum level of understanding you should have. Of course you could always do more, like make your own model of the company's growth and prospectus, as well as make some calls around industry contacts to try to understand industry dynamics for this company.

Great advice, thanks.  I totally agree with it.

For what it's worth, I hadn't intended to come across as apologetic, but rather to acknowledge some of the biases here (and indeed, my own bias most of the time). I wanted to try to address some of the more common anticipated responses.  One might reasonably expect to get a "don't do that, buy index funds" response to all manner of questions about investing in individual stocks.  I myself don't have much interest in the work involved in repeatedly evaluating stocks, but this particular opportunity to invest in something with a lot of "buzz" at the offering price (rather than the opening/market price) makes it a lot more compelling.

The IPO prospectus is not yet available, and the amount allotted to me is TBD.  So, the investment is largely theoretical at this time.  I do thank you for the advice about minimum due diligence, which I agree with and will take to heart.

[hodedofome]

My dad did the same when his best friends medical device company IPO'd. His friend got to retire early and dad got a big chunk of our college paid for. Having an insider who is in the know is extremely helpful. I'm not talking about illegal insider info, just a good perspective on info that everyone else already knows about.

Most high profile IPOs have done well on IPO day the past few years.

[innerscorecard]

If you feel you are able to buy this stock with an amount of understanding and analysis that makes it an investment decision, just buy it. I see in your language a lot of apologetic wording, as if you're committing some kind of grave indiscretion by daring to buy an individual security instead of indexing 100%. You go so far as to say that you will try not to do it again. Just this once, you're saying!

There's no need to feel like that. You won't be barred from heaven by daring to buy an individual security! Even A Random Walk Down Wall Street or Bogle say that it's totally fine to buy individual securities with a small portion of your money.

The real danger would come from hopping in and out of index funds or individual stocks and changing your general strategy on a whim. Don't do that. But you shouldn't feel some huge sense of guilt, as I sense it, by buying a stock that you feel you understand.

Of course, you need to make sure you actually have an investment-level understanding of the company. That means not just buying Tesla, for example, because "Elon Musk is a genius and electric cars are the way of the future."

Have you read the company's IPO prospectus in full? Do you understand it on a basic level? Do the price and terms appear to be reasonable? That is the absolute minimum level of understanding you should have. Of course you could always do more, like make your own model of the company's growth and prospectus, as well as make some calls around industry contacts to try to understand industry dynamics for this company.

Great advice, thanks.  I totally agree with it.

For what it's worth, I hadn't intended to come across as apologetic, but rather to acknowledge some of the biases here (and indeed, my own bias most of the time). I wanted to try to address some of the more common anticipated responses.  One might reasonably expect to get a "don't do that, buy index funds" response to all manner of questions about investing in individual stocks.  I myself don't have much interest in the work involved in repeatedly evaluating stocks, but this particular opportunity to invest in something with a lot of "buzz" at the offering price (rather than the opening/market price) makes it a lot more compelling.

The IPO prospectus is not yet available, and the amount allotted to me is TBD.  So, the investment is largely theoretical at this time.  I do thank you for the advice about minimum due diligence, which I agree with and will take to heart.

Haha, sorry if that seemed too aimed at you. I'm just sick of the assumption that the purchase of any individual security is imprudent, while the purchase of index funds is always prudent. You always have to look at the price and terms, whether you buy something as an individual security or together with a bundle of thousands of other companies.

That's also why you have to wait until the actual prospectus comes out to make an actual decision here. Could be some nasty surprises that you don't like, or a lot that you do like and is a positive surprise.