Escape the Unknown Understanding Liquidity Events in Private Investment

Jake Claver

In this video we discuss private investments and explore the factors that lead to a liquidity event. Whether you're an investor, entrepreneur, or simply interested in the dynamics of the financial world, this video sheds some light on the mechanisms and triggers that can occur.  #PrivateInvestment #LiquidityEvent #FinancialEducation #InvestmentStrategies #FinancialMarkets  Find more from Jake Claver by visiting the links below:  🖥Digital Ascension Group - https://www.digitalfamilyoffice.io 🖥Join my Mastermind Community at https://mastermind.beyondbroke.com  📱Official social media📱 Twitter/X -   / beyond_broke   Instagram -   / jakeclaverqfop   LinkedIn -   / jacobclaver   TikTok -   / jakeclaverqfop   Medium -   / jake-claver   Substack - https://jakeclaver.substack.com/

Transcript

00:00what would cause a liquidity event for private investment and the different ways that that can

00:03happen. And some of the considerations you might have about taking profit. Most of the time when

00:09people make a private investment, it is in the equity of a company. Some of the platforms that

00:13you can do that on would be like EquityZen, Forge, Link2, in that you can purchase equity

00:18in privately owned companies before they IPO or go public. So that is one of the ways that you

00:24could experience a liquidity event for a private investment would be that a company would go

00:29public. And in that they would have to file an S1. So that'll get approved by the SEC. They would

00:36then get listed on a stock exchange. If they do an IPO or initial public offering, oftentimes in the

00:43S1, they will designate a lockup period. So if you were somebody that was on the cap table previous

00:49to them listing the stock on the public market, either here in the US or abroad, the investment

00:57banks, they will go out to them and they will dilute the shares. So they'll issue new shares.

01:01They will sell that to the investment banks. The investment banks would then sell that to

01:05their patrons or clients. And because of that, they basically cater to the investment banks.

01:13And the individuals that own stock previous will be subject to a lockup period. Oftentimes,

01:19it's anywhere from 90 days to a year sometimes before you can liquidate your shares onto the open

01:26market. And so that's kind of not advantageous, right? Especially, you know, oftentimes an IPO will

01:33come out and you'll see the price sell off or fall before the people that were in previous to the IPO

01:40are able to sell their positions. But that's also the investment banks way of hedging themselves so

01:47that their clients get priority. And those, you know, they may have hold beforehand, they get

01:54diluted a little bit. And it's also great for the previous investors of a company and an IPO, but the

02:01founders and executives for the company, they often do very well, as well as the investment banks.

02:07Another way that they can go about it and still list their equity on a public exchange would be a

02:14direct listing or SPAC. There's, there's a few other ways that you could get listed on a public

02:20exchange. But we'll, we'll talk to a direct listing. So that's where they take the people that were in

02:29previous to the IPO or the direct listing onto the public exchange. And they're able to sell their

02:35shares onto the public and retail and their ability to purchase them. One of the recent ones

02:43that happened like this was Coinbase. Oftentimes if a company already has a lot of retail investors

02:50that understand their business model or would want access to the equity, and they've done a really good

02:56job of marketing themselves to the public, they don't necessarily need the investment banks buy-in.

03:01And in those situations, that's where you might see a direct offering. Coinbase did this last year

03:07when the crypto market was, was at the top or close to the top. I know from, you know,

03:15so the people that I am aware of, they got in somewhere around 30 and $40 a share. And so they

03:22did pretty well, 10 X return on their capital. Now that's not always the case. And again, you know,

03:27if they had IPO'd and there had been a lockup period, um, that stock did fall off pretty heavily.

03:32Uh, you know, even now those people are still up on their original investment, just not anywhere near

03:38as much as, as it was. That's one way that you can do it. Uh, another way that you could have a

03:43liquidity event if your company is still private is there's an acquisition and in an acquisition,

03:49they could be acquired by a public company or a private company. And you, you would then be issued

03:54shares, uh, in the new company, um, at whatever ratio was designated during that acquisition based

04:02on the valuations. And you could liquidate, or you could hold whatever you chose to do at that

04:07point. But those are kind of the three main ways that companies will have a liquidity event. Uh,

04:13there are some outside circumstances that occur occasionally where a, um, a company could buy

04:20back shares. You know, if they felt confident they were going to IPO at a higher price than what

04:25they were willing to pay people, uh, they could provide liquidity to shareholders that have been in

04:30the investment for an extended period of time. Oftentimes if you get beyond, you know, the five,

04:35six, seven year mark, that's when companies look at this option. And sometimes they'll buy it back at

04:41a premium in comparison to what some of the shares are selling for on the open market. The company that's

04:47currently doing this or has done this just recently as ripple, um, they've bought back shares,

04:52I believe around $60, uh, from some employees as well as, uh, series C, um, and, and then also some

05:01previous series as well. So that tells me that they're likely confident that, uh, when they do IPO,

05:09they will be at a higher valuation than what they bought the shares back at. And, uh, they'll be able

05:14to sell those shares onto the market or to the investment banks, uh, when they IPO or do the direct

05:19listing, uh, and whatever public exchange they decided to do. So I did say that we would talk

05:24about, you know, the tax ramifications that are involved with that. Now, if you are holding the

05:32private equity, your cost basis and the timeframe are going to be designated when you purchase that

05:36equity. Um, it does not change your basis or timeframe when it goes public. Uh, you would just,

05:44you know, hold if you decided to do so. Now, if you do sell the equity at that point and realize

05:51the gains, you're going to be taxed based on your cost basis and the timeframe held. So let's say,

05:57you know, you bought stock in a company that IPOs three years later, you've held that for at least

06:03three years. It's going to be capital gains tax. If you do sell that position onto the open market.

06:08And at that point, you're going to realize those gains. Let's say you made 10 X on that, uh, that's

06:15going to be 20%, um, tax implication on the profit that you've made for that investment. So let's say

06:22you invested a hundred thousand dollars, you make, um, $900,000. You're going to be taxed at 20% on the

06:29900 grand that you made. And, you know, that'd come out to about $180,000 that you would owe in taxes.

06:35Um, there's not a 10 31 exchange, uh, for private equity. Unfortunately, um, you can do that with

06:44real estate. So if your investment was in real estate and you wanted to roll that to another

06:48property, you can defer those taxes by rolling the capital gains that you would have made on the

06:54original property into the down payment or purchase of another property. And there's a, there's a process

07:00that goes along with that. And you have to designate, you know, what property you intend to

07:03purchase within six months. And there's other components there, but that's, that's one way

07:08that you can mitigate some tax implications on real estate. Really the only way to do it for

07:13private equity is going to be, you know, using a trust or an LLC or a corporation to make your

07:22investments through. And then the profits that you take from that could then be, you know,

07:28used within the corporation in some manner to offset those tax implications. What I most often see

07:36you, you might, you know, donate that capital, uh, or a portion of it, uh, to a cause that you feel is

07:43righteous, uh, or sufficient. You might, um, purchase a vehicle or a piece of equipment that's

07:52over 6,000 pounds. You can use section 179 of the tax code to depreciate up to 80% of that or just in

07:59the same year. You can also utilize, uh, life insurance, uh, and key employee insurance if you

08:06wanted to remain liquid and an infinite banking concept. Um, there's a lot of different tax codes

08:12and always consult with your CPA. Just want to make that, uh, disclaimer here. Nothing said here

08:18is financial advice. Uh, always consult with your financial advisor before making any investment

08:23decisions. Anything said here for tax legal or financial, uh, is for entertainment and educational

08:30purposes only. And, um, yeah, just want to make sure you consult with a professional before making

08:35any decisions. And the other piece there that I didn't mention is you just hold, right? If you just

08:40held the stock in perpetuity, uh, there are ways that you can leverage, uh, loans against those stocks

08:46and those don't have any tax implications. Uh, you might also receive dividends depending on the

08:52company, uh, in the longterm, which would be nice income to have, especially if you accumulated a large

08:57amount of stock early on, uh, bank stocks tend to pay dividends. Other financial institution stocks

09:03tend to pay dividends. Um, so just some thoughts around that for passive income and other ways that

09:11you could defer or remove tax implications, uh, on these investments. So with that, if you haven't

09:18liked and subscribe, please do so. And we'll see you guys on the next one.

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