When it comes to rapid growth, private firms may be better positioned than most publicly traded companies. After all, in the immortal words of Facebook creator Mark Zuckerberg, startups can “move fast and break things.”
While some private companies have found success with this approach, it inherently involves significant risks. By extension, so does investing in shares of pre-IPO companies through the private stock market.
Fortunately, there are several strategies to help mitigate risk in secondary market investments. Here are a few that potential investors might want to keep in mind.
It almost goes without saying, but it’s just as important to do your own research when it comes to private securities as it is in the public markets.
While input from analysts and other market observers can be useful, it is crucial for investors to get their own read on a company's growth potential. This typically means evaluating the financial health, growth prospects, and overall stability of a company, as well as the strength of its management team and position within its sector.
Private companies have additional variables worth considering. For instance, what is the company’s stage of development? Early-stage startups might carry extra risk and face more operational challenges or competitive threats. Companies in later stages, on the other hand, might have a clearer path to liquidity, but could also require a more substantial investment.
Private investments might have high growth potential, but they also tend to have low liquidity. In other words, there’s not a centralized exchange like the Nasdaq or NYSE where investors can quickly cash in their holdings. You would have to find a buyer, agree on a price, and manage the logistics of executing the deal yourself.
Luckily, platforms like Augment* have emerged to address these challenges. Augment provides a secure and centralized marketplace where shareholders of pre-IPO companies can do all of the above and more.
But it is still key for potential investors to consider the liquidity concerns inherent in the private secondary market. To ensure you can eventually monetize your investment, assess demand by other investors and potential exit routes for the company. These might include IPOs, mergers, acquisitions, or private secondary sales. Look for a clear path to liquidity, even if the IPO process is delayed or the company ultimately does not go public.
In the private market, it’s also important to be aware of any lock-up periods or restrictions that may prevent shareholders from selling shares immediately after a company’s IPO.
Mitigating risk in the private secondary market requires thorough due diligence, diversification, careful consideration of liquidity, and a good understanding of the company in question and broader market dynamics. While these strategies may help investors evaluate opportunities in the private secondary market, thorough research and careful consideration of all risks remain essential.
Investing in the private secondary market comes with unique rewards and a specific set of risks that differ from public equities or traditional buy-and-hold strategies. Here are the key categories of risk every investor should understand and how they can be proactively managed.
Funding risk occurs when investors are unable to meet capital calls or funding timelines, especially in structured secondary deals or follow-on rounds. Unlike public markets, where liquidity is instant, private deals often depend on planned cash flow.
How to manage it:
Private companies carry valuation uncertainty, especially in early or mid-stage growth. Capital risk refers to the potential for losing all or part of the invested principal due to company failure or macroeconomic shifts.
How to manage it:
Unlike public equities, secondary shares in private companies are not instantly tradable. Investors may face delayed exits, limited buyer pools, or pricing volatility depending on the market.
How to manage it:
Private companies often lack the compliance infrastructure of their public counterparts, exposing investors to risks tied to poor internal controls, data security breaches, or mismanagement.
How to manage it:
In volatile or uncertain markets, secondaries are gaining favor not just for liquidity, but for risk-adjusted tactical benefits as well.
Secondary shares are often available at discounts to their most recent 409A valuation or internal round price. This can provide instant equity upside and lower cost basis for new investors.
By investing in more mature companies or funds, secondaries compress the traditional “J-curve” seen in private equity, where early losses precede returns. This improves cash flow visibility and accelerates return timelines.
Unlike early-stage investing, secondaries allow for a clearer look at actual financials, customer traction, and operational performance before you commit. Investors can underwrite real-world metrics rather than forward projections.
As the secondary market matures, digital tools are playing a vital role in mitigating both investment and operational risk.
Platforms like Augment enable vetted transactions, provide investor protections, and help manage legal documentation, pricing insights, and counterparty diligence—all in one place.
Leading investors are using tech-enabled dashboards to:
From AI-powered financial modeling to deal-by-deal scenario analysis, digital tools are reducing the friction and uncertainty traditionally associated with private markets.
In recent years, macroeconomic trends—such as rapid interest rate hikes, inflation pressures, and valuation corrections—have tested investors across the board.
Yet these same conditions have created opportunity in the secondary market:
Investors who understand these dynamics can capitalize on temporary dislocations while applying risk-mitigation frameworks built for today’s market, not yesterday’s.
*Augment is a registered Alternative Trading System (ATS). All securities transactions are conducted through Augment Capital, member FINRA/SIPC.
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.