| Pre-ipo equity is the issuance of equity by a | | | | affectively the work that has been done for not |
| company prior to a stock market listing. Don't | | | | much, if any money, by the founders/directors, |
| confuse this with 'private investment' or 'angel | | | | and this is a way of them trying to capitalise it. I |
| investing'. The line is not as fine a one as some | | | | do, however, look very closely at how this is |
| would have you believe. | | | | calculated, and you should too. I saw a prospectus |
| There are many companies offering pre-ipo | | | | a number of years ago where the founder had |
| investments that aren't really what it says on the | | | | worked on the project for two years before |
| tin. They are deals that might,one day, go to IPO. | | | | raising funds. He had charged the company |
| True pre-ipo deals are those that are virtually | | | | £10,000 per week for 'services', (which it didn't |
| already geared to go to an IPO. These have | | | | have, of course) he then wanted to capitalise this |
| taken on brokers and advisers to take them | | | | in the business for 'sweat equity' of over £2mn. |
| through the process or have put in some | | | | If this was Steve Jobs or Warren Buffet, I could |
| mechanism that ensures (as such as it can be) | | | | stretch to that. This guy had never earned more |
| that the company will be listing. | | | | than £50,000 per annum. It was a pass. |
| So here are some guidelines that may help you to | | | | If there is a clause in the prospectus (which there |
| find deals and what to lok for when choosing | | | | generally is) saying that pre-emption rights |
| what to invest in: | | | | (basically pre-emption rights is the right for |
| 1. Listen to Everybody. This is probably a | | | | shareholders to be offered shares first before |
| controversial one to start off with, because there | | | | new investors) have been suspended up to £X. |
| are so many jokers and dreamers out there who | | | | That means that the company can issue shares |
| have zero chance of getting their issue, or that of | | | | up to that level without asking the shareholders. |
| their clients issue (in the case of brokers) off the | | | | For example if the authorised capital is 100mn |
| ground. However, if you are new to this area | | | | shares and the offer is for 10mn, and the |
| then reading prospectuses of those that are | | | | company has suspended pre-emption rights up to |
| rubbish will give you an insight to those that are | | | | 100mn shares. You could be investing and then be |
| viable. Talking to everyone will also give you a | | | | diluted massively by the issuance of a further |
| regular deal flow of ideas and, sometimes, will give | | | | 90mn shares. |
| you access to people in these small companies | | | | Check out and 'loans from directors'. There simply |
| that are serial deal doers which is what you need | | | | shouldn't be any. I would be hugely suspicious if |
| (see 2). | | | | there were any outstanding loans because why |
| Talking to everyone will also allow you to get a | | | | would the directors be asking you to invest at a |
| feel for who is good in the space and who isn't | | | | certain price but would not be prepared to |
| when dealing with brokers. I read an excellent | | | | capitalise their loans? They either believe in the |
| quote on the net the other day "Even a blind | | | | company or they don't. If they haven't converted |
| squirrel sometimes finds a nut in the forest". This | | | | their loans it would be a pass for me. |
| is a good quote to bear in mind when you are | | | | Check out if any director has been involved in |
| dealing with brokers you don't rate. Sooner or | | | | companies liquidated previously. This is point that I |
| later they may stumble on something interesting. | | | | argue with people on. Some see failed companies |
| 2. Cultivate you list of 'players'. This list is not | | | | as a bad thing, I believe that people grow by |
| necessarily static. Like a football player, | | | | learning from their mistakes, don't write the |
| sometimes they have a bad season, sometimes | | | | company or director off because he has made |
| they have a good season. | | | | errors, but do look at the circumstances of these |
| You need to look for the player that is on form. | | | | errors. |
| But most importantly you need to know who | | | | Check out how much management owns of the |
| they are in the first place. Looking on the net is a | | | | shares. If its above 75% after the offer, be |
| good place to start. Choose your search term | | | | careful, there are a lot of things that can be done |
| "successful entrepreneurs" etc etc. But drill down | | | | by someone holding 75% of the shares that may |
| through the press dross and find out whose | | | | be against the interest of shareholders. If it is less |
| names keep occurring and in what sector. You will | | | | than 30%, ask yourself whether there is enough |
| find that these players have a 'fan club' who | | | | to lose or gain from the success or failure of the |
| follow their investments. You want to be in the | | | | company for the directors. I like to see between |
| 'fan club' of as many of the players as you can.It | | | | 40%-60% (obviously depending on the size of |
| doesn't mean that the 'players' are just individuals, | | | | the company and the stage of investment). |
| some firms have a good track record and should | | | | On the subject of shares, be very, very careful |
| be watched. | | | | of warrants and convertible debt from the |
| For example, a recent survey of the best and | | | | management or outside investors. Convertibles |
| worst performing NOMADS (Nominated Advisers) | | | | are a fabulous tool for investors when used |
| on AIM was released by Lombard Asset | | | | correctly, but when they are not they can be a |
| Management and Growth Company Investor. This | | | | nightmare. For example, lets say there is a loan |
| is a key list to look at when considering pre-ipo | | | | for £200,000 to the company that is convertible |
| companies looking at AIM floats. Obviously some | | | | into shares at 1p. f you are buying shares at 3p |
| of the info was skewed by the number of issues, | | | | hoping for the IPO price to be 6p, look at the |
| but it is a good place to start. Basically if you are | | | | dilutive affect those warrants will have. I am not |
| looking at a pre-ipo deal and the NOMAD taken on | | | | saying dismiss any issue on this basis, because the |
| does not have a great track record then it may | | | | guy who put in the £200,000 may have been |
| be a factor in your decision. Join mailing lists of | | | | taking a huge risk when he put the money in and |
| firm that do deals so that you can receive | | | | now the company is OK, but do look at these |
| updates on transactions they are involved in, if | | | | carefully. |
| you see something interesting then you can make | | | | Check out other shareholders. If you see Warren |
| the contact.HF Capital ( London have an 'alert | | | | Buffet in there, chances are it is a good one to |
| service' among other small corporate finance | | | | look at. If you see 'Bodgit and Scarper |
| firms. | | | | Investments' you may wish to take another look. |
| 3. Read the prospectus. Obvious? Most people | | | | What are the transfer rights? In a small number |
| don't get beyond the nice blurb in the first 20 | | | | of prospectuses I have seen odd transfer rights |
| pages. The best places to look are 'Risk Factors' | | | | stated in the docuemnt. Ones where transfers |
| and 'Statutory and General Information'. Risk | | | | are restricted. In a private investment you don't |
| factors will, more often than not, be generic but | | | | want this and, frankly, there is no good reason |
| may bring up something for further research. | | | | for it. If it's in there ask why. |
| The 'Stats and Gens' should give you a better | | | | 4. Do your Research. An obvious one, but a |
| idea of the company itself. Look at the history | | | | crucial one. Check out the sector, the |
| section. This should tell you how many shares are | | | | management, the investors, the concept, the |
| authorised (meaning how many shares they could | | | | product, the accounts..everything. If you find that |
| issue) and the issued share capital (meaning how | | | | the information you come up with is beyond your |
| many shares they have issued). The issued share | | | | knowledge then ask someone who knows about |
| capital will tell you, for example, that there have | | | | such things. If it is still beyond you and you cannot |
| been 10,000,000 shares issued and they are fully | | | | rely on other known investors to have done the |
| paid up (meaning that if the basic price of the | | | | research, pass. |
| share is 1p - called the 'nominal' price, then | | | | 5. Make a Move, but don't Over Do It. By all |
| £100,000 has been paid for these by the | | | | means, if you think you have discovered the next |
| founders 10mn / 1p). If you are being asked to | | | | Google and want to invest your life savings, go |
| pay £1 for these shares then you may want to | | | | ahead. But don't complain if it doesn't work out. In |
| have a look at why you are paying 99p over the | | | | our accounts we aim to be spreading investments |
| initial price for the shares, is it worth £10mn? | | | | in these kind of deals across a range of shares. |
| Also something to look out for is that the shares | | | | 6. Define what your objective is with each issue . |
| are 'partly paid'. In the UK, for example, the | | | | Remember we are talking here about pre-IPO's. |
| minimum share capital for a PLC (the issue has to | | | | So, there will be a decision to make when the |
| be a PLC to be offered to the public) is £50,000 | | | | company actually lists. Is it good for a quick sale |
| but only 25% of that needs to be paid up | | | | after the float? Or is it worth hanging on for a |
| meaning a PLC can have only £12,500 paid in by | | | | defined period of time? These are questions that |
| the original shareholders. If the shares are partly | | | | will be answered by the research that you have |
| paid up ask yourself why the rest hasn't been | | | | done. If it is a 'keeper' you will know by now. |
| done when you are being asked to pay a | | | | By following the steps above you may lose out |
| premium. | | | | on a few '10 baggers' but it is a little like playing |
| On this subject, look for issues that have been | | | | Blackjack. If you play the odds and take the odd |
| 'fluffed up' by the directors/founders saying that, | | | | flyer when things look good, then you will win. If |
| as an example. £2mn has been paid in by the | | | | you bet on getting 21 every time, you are going |
| directors as 'sweat equity'. Sweat equity is | | | | to go broke very, very quickly. |