The private and pre-IPO market lacks a transparent, liquid way to trade derivatives like call and put options, unlike public markets where options trading is well-established. This gap leads to opaque valuations, limited risk management tools for early investors, and no market-driven mechanism to correct overvaluations. A potential solution could involve creating a marketplace where accredited investors trade standardized options on private company shares, improving price discovery and liquidity.

How It Could Work

One way to approach this is by building a platform where participants—such as early employees, venture capitalists, and institutional investors—trade options on private company shares. For example, an employee with vested shares could sell call options to generate income without selling their equity, while a hedge fund could buy put options to bet against a company's valuation. The platform could standardize contracts with strike prices and expiration dates, letting supply and demand determine premiums. Over time, aggregated bids and asks would help reveal market-implied valuations, similar to public options markets.

Key Benefits and Stakeholders

This marketplace could benefit multiple groups:

Employees & Founders: Monetize equity without outright sales.
Investors: Hedge positions or gain leveraged exposure.
Companies: Indirectly benefit from better valuation transparency.

The platform operator could generate revenue through trading fees, while liquidity could be bootstrapped by partnering with market makers like hedge funds.

Execution and Challenges

A minimal viable product (MVP) might start with call options on high-profile unicorns, using standardized terms based on recent funding rounds. Regulatory compliance could be addressed by partnering with broker-dealers, and counterparty risk could be mitigated through a clearinghouse model. The biggest hurdles would likely be liquidity and regulatory approval, but starting small and scaling gradually could help manage these risks.

Compared to existing secondary markets like Forge or SharesPost, this approach introduces derivatives for more nuanced strategies. While challenges exist, the idea presents a way to bring public-market efficiency to private company investing.

Marketplace for Trading Options on Private Company Shares