Wall Street private banks vie for pre-IPO AI clients

Wall Street private banks are increasing loans to founders and employees at AI and tech startups, using pre-IPO shares as collateral or offering short-term unsecured credit. Goldman Sachs’ private bank in San Francisco reported loan balances up 50% since 2023. JPMorgan has seen global demand for such lending rise roughly tenfold in recent months.

Goldman Sachs, JPMorgan Chase and Morgan Stanley offer a range of products to provide liquidity before companies list. Options include short-term unsecured recourse loans that typically mature in 12 to 18 months, loans pledged against illiquid private shares, and secured lines tied to portfolios of liquid securities. Some specialist lenders propose profit-sharing deals that give borrowers cash now in exchange for a share of future gains without personal liability if the stock falls.

Clients seek cash for home purchases in high-cost markets, exercising stock options, estate planning and tax bills. Banks view these relationships as a way to win later underwriting roles and long-term wealth-management business if a company goes public within a few years.

Bank and law firm executives say the client base is younger and moves faster than in past cycles. Solenn Seguillon, head of the technology practice at JPMorgan’s private bank in San Francisco, noted, “The founders that we’re seeing are very young. The cycle is so much shorter and you have to move very quickly. You have to start building this relationship right away.” Garret Spiecker, a senior managing director at Citizens’ private bank, added that banks are expanding the client definition beyond founders to include later employees whose stakes have grown large.

Legal and operational checks have become more prominent. Lawyers assess whether companies allow share pledging and review transfer restrictions. Morgan Stanley’s wealth team said much of the current risk is issuer-specific, and banks are selective about counterparties and timing, often focusing on companies likely to list within three years.

The market for secondary sales of private shares has expanded, creating potential exit paths for lenders. Still, lenders face risks if a startup’s valuation falls or an IPO plan collapses. Observers recall earlier cases where pledged pre-IPO stock led to large losses for both lenders and shareholders when values dropped sharply.

Banks are staffing up in tech hubs. Goldman’s San Francisco private-banking unit has increased its wealth solutions headcount substantially in recent years, and JPMorgan plans to double its private-banking staff in San Francisco over the next five years while expanding local offices. Morgan Stanley reported sizable inflows of new wealth-management assets tied to recent IPO activity.

Borrowers weigh trade-offs between lower-rate recourse loans that create personal liability and alternative structures that shift some downside to the lender in exchange for shared upside. Travis Kell, an AI founder who sought financing in 2022, recalled turning down bank proposals that required large share pledges and instead accepted a profit-share arrangement to avoid pressure to sell in uncertain markets.