IPO 4 U?

There's a growing trend in the IPO landscape, offering customers early access to the stock. Deliveroo, AirBNB, and Robinhood are a few familiar names that have taken this approach. I spoke with Bloomberg not long ago about the pros and cons of this trend.

IPO, early stage investing, Robinhood, AirBNB, DoorDash, stock options, equity, RSU, restricted stock, NSO, ISO, financial plan, financial planning, financial planner
IPO stock options are a gold mine...no?

It works like this...if you were an AirBNB host last year during their IPO or you were a Deliveroo customer (Deliveroo is Europe's version of DoorDash) or you're a current Robinhood account holder, you can access the stock in the same manner offered to investors and employees.

Typically a retail investor (aka regular investor) cannot purchase an IPO until it has started trading on the public market (usually NYSE or NASDAQ). But in this case, the companies are carving out a portion of their stock to offer to their 'users' prior to the IPO.

Robinhood is attempting to 'democratize' investing and one way to do that is to let the little guy in on the action in hopes that the profits in early trading don't go straight to well-heeled investors.

But...and this is a big BUT...investing in an IPO is risky and there's a reason the SEC historically limits this to Qualified Investors (someone with a net worth >$50M). After an IPO there's usually a 'lockup period' of 30-180 days before the owner can begin trading. This could cause an investor to miss out on the big upswing in the first week or two of trading. Furthermore, if the investor lacks diversification in his/her portfolio, this concentrated investment in an early stage company is even more risky. My preference is that the investment is for at least 2-5 years which allows the IPO trading pattern to settle out and the investor to take advantage of long-term capital gains tax treatment when he/she goes to sell the stock.

Bottom line: Have a financial plan and consider the IPO as part of the larger plan. If the opportunity to get in early on an IPO comes your way, approach this opportunity with caution knowing you could be limited in the early days. Cap your investment at 10% of your investable assets to maintain a broad diversification across asset classes. And finally, maintain your emergency fund!


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