I am interested in investing in a restaurant's "pre-IPO" stock. The
shares are set at $1 and will be priced higher when the restaurant
opens. Is $1 a share not just an arbitrary value?
What are some things I should be aware of when deciding if the stock
is worth $1 to me? (number of shares total, etc.) I am more familiar
with publically traded shares on NASDAQ for instance. What is the
right way to go about this?

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Clarification of Question by investingguy20-ga on 11 Mar 2006 19:24 PST

Thank you.

My worry was that the stock value could be diluted by the main owner
of the restaurant.

I have not yet been provided with adequate information from him on the
way this transaction would be carried out, and am asking on here to
see what to look out for. I am only interested in investing $3000-5000
and would not like to hire a lawyer for this.

Another thing that is interesting is that he says he can provide
"written guarantee that you will double your money in two years". Is
such a guarantee enforceable?

Once a company has been formed the 'face value' of its shares is meaningless.

Something rather disturbs me about your question, I can't exactly pin
down what is worrying me.

Shares in a company are a way of describing percentage ownership.
- that can go horribly wrong if one (or a group of) shareholder(s)
control enough of the company to issue more shares 'diluting' the
minority shareholders' holdings.

Generally, my understanding is that one stays well away from shares in
a company where 75%+ is held by an individual or a 'concert party'.

Restaurants are risky businesses, and I guess that you have good
reasons for wanting to invest, probably not totally financial ones.

My inclination would be to draft up a list of 'rules', run them past a
competent lawyer and not put in a dime unless those are agreed by all
parties and demonstrably legally enforceable.

Here is what the SEC says about pre-IPO stocks:
http://www.sec.gov/investor/pubs/preipo.htm

Another thing that is interesting is that he says he can provide
"written guarantee that you will double your money in two years". Is
such a guarantee enforceable?

Such a guarantee is certainly not a commitment a serious person would make,
and he could absolutely not do so in a prospectus for the IPO.  On the
contrary, in the prospectus (which has to be provided), it will tell
all the down-side risks, which are great for a restaurant.
What is he guaranteeing:  that the stock will go on the market and
double in price?  Since he can't claim that the stock will double in
value, who will pay?
He, himself?  If you have to claim it, so will everyone else he promised this to.

The restaurant may be a success, but the stock may not take off, so
maybe he can, but not if he has promised all his shareholders that he
will repay twice the capital invested in the undertaking.

If he threw this in as "kicker" since you posted your question, that
would be very dubious.
One might also ask what experience he has with setting up a
corporation the is planning an IPO.  Does the company already exist?

I don't like it.