How are investment funding valued when invested in a company before it goes public?
This is a question of how does someone value a business.   Typically, it is some function of how much the company owns, how much the company owes, how risky is the company's business, and how much the company makes in profit. For example if a company (or investment) make $100/year, every year no matter what, how much would you pay for that?   If you pay $1,000 you'll make 10% each year on your investment.  Is that a good enough return?   If you think the risk of the company requires a 20% payoff, you shouldn't pay more than $500 for the company.
"To summarize your starting situation: You want to: Possible paths: No small business Get a job. Invest the 300K in safe liquid investments then move the maximum amount each year into your retirement accounts. Depending on which company you work for that could include 401K (Regular or Roth), deductible IRA, Roth IRA. The amount of money you can transfer is a function of the options they give you, how much they match, and the amount of income you earn. For the 401K you will invest from your paycheck, but pull an equal amount from the remainder of the 300K. If you are married you can use the same procedure for your spouse's account. You current income funds any vacations or splurges, because you will not need to put additional funds into your retirement plan. By your late 30's the 300K will now be fully invested in retirement account. Unfortunately you can't touch much of it without paying penalties until you are closer to age 60. Each year before semi-retirement, you will have to invest some of your salary into non-retirement accounts to cushion you between age 40 and age 60. Invest/start a business: Take a chunk of the  300K, and decide that in X years you will use it to start a small business. This chunk of money must be liquid and invested safely so that you can use it when you want to. You also don't want to invest it in investments that have a risk of loss. Take the remaining funds and invest it as described in the no small business section. You will completely convert funds to retirement funds earlier because of a smaller starting amount. Hopefully the small business creates enough income to allow you to continue to fund retirement or semi-retirement. But it might not. Comment regarding 5 year ""rules"": Roth IRA: you have to remain invested in the Roth IRA for 5 years otherwise your withdrawal is penalized. Investing in stocks: If your time horizon is short, then stocks are too volatile. If it drops just before you need the money, it might not recover in time. Final Advice: Get a financial adviser that will lay out a complete plan for a fixed fee. They will discuss investment options, types not particular funds. They will also explain the tax implications of investing in various retirement accounts, and how that will impact your semi-retirement plans. Review the plan every few years as tax laws change." "Index funds can be a very good way to get into the stock market. It's a lot easier, and cheaper, to buy a few shares of an index fund than it is to buy a few shares in hundreds of different companies. An index fund will also generally charge lower fees than an ""actively managed"" mutual fund, where the manager tries to pick which stocks to invest for you. While the actively managed fund might give you better returns (by investing in good companies instead of every company in the index) that doesn't always work out, and the fees can eat away at that advantage. (Stocks, on average, are expected to yield an annual return of 4%, after inflation. Consider that when you see an expense ratio of 1%. Index funds should charge you more like 0.1%-0.3% or so, possibly more if it's an exotic index.) The question is what sort of index you're going to invest in. The Standard and Poor's 500 (S&P 500) is a major index, and if you see someone talking about the performance of a mutual fund or investment strategy, there's a good chance they'll compare it to the return of the S&P 500. Moreover, there are a variety of index funds and exchange-traded funds that offer very good expense ratios (e.g. Vanguard's ETF charges ~0.06%, very cheap!). You can also find some funds which try to get you exposure to the entire world stock market, e.g. Vanguard Total World Stock ETF, NYSE:VT). An index fund is probably the ideal way to start a portfolio - easy, and you get a lot of diversification. Later, when you have more money available, you can consider adding individual stocks or investing in specific sectors or regions. (Someone else suggested Brazil/Russia/Indo-China, or BRICs - having some money invested in that region isn't necessarily a bad idea, but putting all or most of your money in that region would be. If BRICs are more of your portfolio then they are of the world economy, your portfolio isn't balanced. Also, while these countries are experiencing a lot of economic growth, that doesn't always mean that the companies that you own stock in are the ones which will benefit; small businesses and new ventures may make up a significant part of that growth.) Bond funds are useful when you want to diversify your portfolio so that it's not all stocks. There's a bunch of portfolio theory built around asset allocation strategies. The idea is that you should try to maintain a target mix of assets, whatever the market's doing. The basic simplified guideline about investing for retirement says that your portfolio should have (your age)% in bonds (e.g. a 30-year-old should have 30% in bonds, a 50-year-old 50%.) This helps maintain a balance between the volatility of your portfolio (the stock market's ups and downs) and the rate of return: you want to earn money when you can, but when it's almost time to spend it, you don't want a sudden stock market crash to wipe it all out. Bonds help preserve that value (but don't have as nice of a return). The other idea behind asset allocation is that if the market changes - e.g. your stocks go up a lot while your bonds stagnate - you rebalance and buy more bonds. If the stock market subsequently crashes, you move some of your bond money back into stocks. This basically means that you buy low and sell high, just by maintaining your asset allocation. This is generally more reliable than trying to ""time the market"" and move into an asset class before it goes up (and move out before it goes down). Market-timing is just speculation. You get better returns if you guess right, but you get worse returns if you guess wrong. Commodity funds are useful as another way to diversify your portfolio, and can serve as a little bit of protection in case of crisis or inflation. You can buy gold, silver, platinum and palladium ETFs on the stock exchanges. Having a small amount of money in these funds isn't a bad idea, but commodities can be subject to violent price swings! Moreover, a bar of gold doesn't really earn any money (and owning a share of a precious-metals ETF will incur administrative, storage, and insurance costs to boot). A well-run business does earn money. Assuming you're saving for the long haul (retirement or something several decades off) my suggestion for you would be to start by investing most of your money* in index funds to match the total world stock market (with something like the aforementioned NYSE:VT, for instance), a small portion in bonds, and a smaller portion in commodity funds. (For all the negative stuff I've said about market-timing, it's pretty clear that the bond market is very expensive right now, and so are the commodities!) Then, as you do additional research and determine what sort investments are right for you, add new investment money in the places that you think are appropriate - stock funds, bond funds, commodity funds, individual stocks, sector-specific funds, actively managed mutual funds, et cetera - and try to maintain a reasonable asset allocation. Have fun. *(Most of your investment money. You should have a separate fund for emergencies, and don't invest money in stocks if you know you're going need it within the next few years)." "&gt; can I use venture like that in a financial context, or does it refer specifically to venture capital?  Yes, any business is a ""venture"" so to speak.   &gt; so they would receive a smaller return, yes?  POSSIBLY yes.  Mezzanine investors are, well, ""middle"" investors. They're beyond seed and venture capital, but before more ""late-stage"" private investment. That doesn't *necessarily* mean they're ""after a seed or venture capital investment."" It can mean that, or it can simply mean the business is a little more advanced than a pure idea, or pre-revenue, etc.  Let's say a company is pre-destined to get to $100m in value IF it can secure funding. Naturally, later investors will have a smaller return. Of course, private investments are generally for smaller, younger companies, and thus are more risky, so an investor can still *lose* value in a private equity investment.  &gt; Is mezzanine investing particularly profitable?  Yes, absolutely. You have to understand, with investments in private equity, firms and individuals are often looking for a *multiple* of their investment (i.e. if an investor invests $1m, they expect $2m, $3m, etc. back). This is not necessarily for all levels of private equity, but many levels will attempt this. Generally the idea (as far as I'm aware) is a 20% IRR (which means that generally, the investment grows by 20% *compounding* yearly).   &gt; Secondly, why is dilution so important further down the road? Is it to do with valuation?  Absolutely. Let's think of our example earlier, where you, me, and Joe each own 33% at $300 total value.  If suddenly another company wants to buy ALL of our equity for $600, then we're all pretty happy. Each of us will get $200. HOWEVER, let's say Joe hadn't come along. If that other company *then* made an offer for $600, we'd both get *$300* for the company.   There's some other things about dilution too, such as the possible loss of control, but we'll save that for later.  &gt; Finally, at what point would a company aim to meet an IPO? Is it case specific, or is there a general understanding of the ""best time""?  It's VERY case specific. In *most* cases, depending on the industry, the company will be relatively a bit older, have both revenue and profitability, and a history of operations. In some cases, companies like this will choose to *never* go IPO (such as the Big 4 auditing firms, for one, among others).   There are, of course, exceptions. Many smaller pharmacueticals are *pre-revenue* and are traded on the market. Tesla is getting revenue, but *not profitable* and it's on the markets as well. These are, naturally, riskier investments, but at least you've got liquidity to help a bit with that.   When a private equity (PE) firm is looking to exit (sell their stake) through an IPO, they will try to engineer the company to be as attractive as possible to public investors. In fact, many PE firms will stipulate specific terms, and possibly get control of the company from the owner, when they initially invest. But there's a lot that goes into it. Perhaps /u/wreckingcru or /u/Seraphinic can go into a bit more detail on PE exits as while it's my chief interest and my career goal, it's not quite where I'm at *yet.*" "I am a tax lawyer and ALL the RESPONSES ABOVE are 1/2 Correct but also 1/2 Wrong and in tax law this means 100% WRONG (BECAUSE ANY PART INCORRECT UNDER TAX LAW will get YOU A HUGE PENALY and/or PRISON TIME by way of the IRS!  So in ESSENCE ALL the above answers are WRONG! Let me enlighten you to the correct answer in 5 parts, as people that do not practice tax law may understand (but you still probably will not understand, if you are NOT a Lawyer). 1) All public companies are corporations (shown by Ltd.), 2) only Shareholders of Public companies (ie, traded on the NYSE stock market) are never liable for debts of a bankrupt company, due to the concept of limited liability. 2) now Banks may ask a sole proprietorship (who wants to incorp. for example) to give collateral, such as owners stocks/bonds or his/her house, but then of course the loanee can tell the Bank No Thanks and find a lender that may charge higher interest rates but lend money to his company with little to NO collateral. 3) Of course not all companies are publicly traded and these are called private companies. 4)""limited liability"" has nothing to do directly with subsequent shareholders (the above answer is inaccurate!), it RELATES rather to INITIAL OWNERS INVESTMENT in their company, limiting the amount of owner loss if the company goes bankrupt. 5) Share Face-value is usually never related to this as shares are sold at market value in real life instances (above or below face-value), or the most money Investments Banks or owners can fetch for the shares they sell (not what the stock's face-value is set at upon issuance). Never forget, stocks are sold in our Capitalistic System to whomever pays the most, as it is that Buyer who gets to purchase the stock!" "(Value of shares+Dividends received)/(Initial investment) would be the typical formula though this is more of a percentage where 1 would indicate that you broke even, assuming no inflation to be factored. No, you don't have to estimate the share price based on revenues as I would question how well did anyone estimate what kind of revenues Facebook, Apple, or Google have had and will have. To estimate the value of shares, I'd likely consider what does my investment strategy use as metrics: Is it discounted cash flow, is it based on earnings, is it something else? There are many ways to determine what a stock ""should be worth"" that depending on what you want to believe there are more than a few ways one could go." "I primarily intend to add on to WBT's answer, which is good. It has been shown that ""momentum"" is a very real, tangible factor in stock returns. Stocks that have done well tend to keep doing well; stocks that are doing poorly tend to keep doing poorly. For a long-term value investor, of course fundamental valuation should be your first thing to look at - but as long as you're comfortable with the company's price as compared to its value, you should absolutely hang onto it if it's been going up. The old saying on Wall Street is ""Cut your losses, and let your winners ride."" As WBT said, there may be some tangible emotional benefit to marking your win while you're ahead and not risking that it tanks, but I'd say the odds are in your favor. If an undervalued company starts rising in stock price, maybe that means the market is starting to recognize it for the deal it is. Hang onto it and enjoy the fruits of your research." As far as I know, the AMT implications are the same for a privately held company as for one that is publicly traded.  When I was given my ISO package, it came with a big package of articles on AMT to encourage me to exercise as close to the strike price as possible.  Remember that the further the actual price at the time of purchase is from the strike price, the more the likely liability for AMT.  That is an argument for buying early.  Your company should have a common metric for determining the price of the stock that is vetted by outside sources and stable from year to year that is used in a similar way to the publicly traded value when determining AMT liability. During acquisitions stock options often, from what I know of my industry, at least, become options in the new company's stock.  This won't always happen, but its possible that your options will simply translate.  This can be valuable, because the price of stock during acquisition may triple or quadruple (unless the acquisition is helping out a very troubled company). As long as you are confident that the company will one day be acquired rather than fold and you are able to hold the stock until that one day comes, or you'll be able to sell it back at a likely gain, other than tying up the money I don't see much of a downside to investing now. Presumably you're talking about the different share class introduced in the recent stock split, which mean that there are now three Google share classes: Due to the voting rights, Class A shares should be worth more than class C, but how much only time will tell. Actually, one could very well argue that a non-voting share of a company that pays no dividends has no value at all. It's unlikely the markets will see it that way, though.