By SARAH MORGAN
Wealthy clients of> Goldman Sachs now can buy shares of Facebook, thanks to the bank's agreement this week to invest $450 million in the social networking giant. But for those not on Goldman's elite list, there's another way to own a piece of Facebook and other non-public firms through a growing secondary market for private-company stock, if they're willing to take some substantial risks.
With hot tech companies like Twitter, LinkedIn and Facebook still officially off-limits to retail investors, sites like SharesPost and SecondMarket, which match buyers with sellers of fast-growing firms, have found a niche. SecondMarket sold $400 million worth of shares last year, up from $100 million in 2009. SharesPost started in June 2009 and has so far connected investors with nearly a billion dollars of private-company stock, according to a spokeswoman.
Both sites match qualified investors with employees or early-stage investors who have shares in private companies -- and need the cash. Investing is restricted to "accredited" investors. These individuals (or couples) must have a net worth of at least $1 million, or an annual income of $200,000 or more for the past two years ($300,000 for couples), with a "reasonable expectation" of making that much in the coming year.
What's available? Sellers are offering Facebook shares on SharesPost for between $25 and $35 a share, prices that imply a firm valuation of between $56 billion and $79 billion -- higher than the $50 billion that Goldman's official investment implied. Shares of Twitter are being offered at $22 to $25, suggesting the company is worth between $4.9 and $5.6 billion. In comparison, Google's (GOOG)
On the secondary markets, shareholders get an exit, and interested investors an opportunity. But there are significant drawbacks, including a lack of disclosure of financial information and the fact that shares don't trade often, which means it can be hard to cash out when you want to, says the Financial Industry Regulatory Authority. Also, because many early-stage companies fail, investment professionals consider pre-IPO investing very risky. "You don't go in with the butter and egg money," says David Brophy, the director of the Center for Venture Capital and Private Equity Financing at the University of Michigan. "You go in with money you can afford to lose."