When Etsy filed to go public in early March, it did what an increasing number of hot tech startups are doing: It tried to loop in small individual investors along with the big guns who usually profit from initial public offerings.

Tucked away in its registration statement, or S-1, the New York-based crafts marketplace noted its plans for allowing individual investors, including Etsy's customers and retailers, to lasso up to 5 percent of its common shares, which will be up for grabs in the next few months. While that may not seem so noteworthy, it's all about the timing.

Typically when a company first goes public, only a rarefied few can access a company's shares at the time those shares get priced--that is, prior to the opening day bell. That means these investors can fully enjoy any first day pop in price that has tended to make a lot of institutional investors and underwriting banks, not to mention company founders, rich on opening days.

What Etsy and other companies have sought to do instead is allow individual investors in to purchase shares at the same time as the big institutional investors.

"It's a fantastic idea to reserve an IPO allocation for those customers who are the lifeblood of a business," says Patrick Chung, co-founder and general partner of Xfund, an affiliate of venture capital firm New Enterprise Associates, of Menlo Park, California. "Not only are these customers and users the people who know and love the company the most, but the ethos of a level playing field is a powerful one that can differentiate the best companies."

Etsy, which is in a quiet period, declined to comment. However, retail investors will be allowed to buy shares worth between $100 and $2,500 through a Morgan Stanley website, the Wall Street Journal reports.

In October, Dave & Buster's, the restaurant and game arcade chain set aside 2.5 percent of its shares for retail investors in its public offering registration papers. Similarly, Lending Club, the alternative lender and loan marketplace that went public in December, set aside up to 10 percent of its shares for individual investors, says Renaissance Capital research analyst Greg Leffert.

Reddit, the social news site, decided to put an even more novel spin on the practice. In October, when the company landed $50 million in funding from Y Combinator, then chief executive Yishan Wong took to the company blog to say he planned to put 10 percent of the deal's shares aside for investors.

"We've long been trying to find a way for the community to own some of Reddit, because it is your contributions that help to anchor the site and give it strength," Wong wrote at the time. He added that Reddit might allow the sale to take place through a cryptocurrency. Wong, however, stepped down as chief executive in November, and it's unclear if the company still plans to go ahead with the sale. A Reddit spokeswoman said the company was waiting for the technology and laws around cryptocurrency to advance more before moving ahead.

"We want to make sure we can give the community the full value of the equity when they receive it in the future, and today we haven't been able to find a way to do that within existing regulations," the spokeswoman said.

Still, financing experts say maneuvers such as those taking place at the time of public offerings are a great way to ensure the right people invest in your company.

"These allocations go to the real 'smart money,' investors who actually use and understand the product," Chung says.

Published on: Mar 10, 2015