Investing in Startups with Funds from Your IRA
Did you know that you can invest in late-stage startups like AirBnB, DoorDash, Casper, Robinhood, and WeWork (ok, WeWork isn’t a good idea)?
Also, did you know that you can use money from your IRA to invest in these startups?
Before 2019, I didn’t realize that the answers to these two questions were a resounding yes. The most common way for someone to invest in startups is through a secondary transaction. Secondary transactions involve acquiring shares held by existing shareholders (investors, founders, employees, etc.).
And as for using funds from your IRA, you can use a self-directed IRA, which is essentially a subset of an IRA that allows you to use IRA funds to invest in alternative assets including startups. I’ll write more on each concept (secondaries and self-directed IRAs) later but let’s cut to the chase and put this into practice.
For context, in 2019, I completed over 25 secondary transactions across 8 startups using my self-directed IRA. Here’s a quick overview of how to do this.
There are two parts to this: 1) gaining access to a secondary opportunity, and 2) using a self-directed IRA to fund the opportunity.
Secondary Opportunites
The main ways to gain access to startups are using a broker (someone who helps you find an opportunity and helps you invest in it) or connecting with a shareholder directly (through a personal connection or introduction).
Here are common ways secondary opportunities are structured:
You acquire shares from the shareholder (via a direct transfer) and as a result, get on the company’s cap table.
You acquire an interest in an SPV (special purpose vehicle) that is already on a company’s cap table.
You enter into a forward contract (i.e. a right to own shares in the future) with a shareholder directly or acquire fund units of an SPV consisting of multiple forward contracts.
Self-Directed IRA
These vehicles allow you to use capital in your IRA to invest in alternative investments including venture-backed startups. The process is straightforward. You open up a self-directed IRA and then when you’re ready to invest, your self-directed IRA will facilitate transferring funds from your IRA into the startup investment. (Note that the behind-the-scenes work necessary to facilitate the transfer of funds is more complex, but your self-directed IRA provider will handle all of that).
Note that investing in startups is risky and you should assume there’s a chance you’ll lose a majority if not all of your investment. Before proceeding, you should consult a registered investment adviser (RIA) firm like mine.