So you’re holding the bag on private stock you’d like to offload.
I get it; I’ve been there.
My name is AJ, and after exiting my SMB for multiple seven figures, I built SBB to get these types of questions answered.
Let’s get rolling (and hopefully get you paid).
Time to nerd out and dive in!
Key Takeaways
- Private shares of stock are only available to employees and investors, not the public.
- The issuing company must approve the purchase and sale of private stock.
- Buying private stock from a company that intends to go public is a (potentially) lucrative investment strategy.
What Is Private Company Stock?
A private business is a privately held company or commercial entity.
Therefore, these companies do not offer shares of stock to the general public and are not listed on the public stock exchange.
Private company stocks include shares of the business issued to employees or investors.
For instance, several startups use the equity from private shares to pay employees when the business initially launches, and cash flow is limited.
Because privately held companies are usually small, they sell fewer shares of stock.
This also means this stock is much harder to liquidate (but more on that later).
How Private Company Stock Works
Private stock works (almost) the same as public stock.
When a company is formed, they issue shares to owners, investors, and early employees (the same way a public company sells stock on the open market).
- In the case of ownership, the stock is usually given away for starting the company.
- In the case of Investors, the stock is often sold in exchange for company equity.
- In the case of employees, the stock is often given away in exchange for work being performed.
Public Stock Vs. Private Stock Explained
Public Stock
- Sells openly on public markets
- Typically, it has some fair market value
- Very liquid (because there are a lot of buyers)
- It goes up and down based on who’s buying or selling
Private Stock
- Illiquid because there’s no public market
- Value is based on the industry, current market conditions and EBITDA
- Illiquid and hard to sell
- It goes up or down based on company metrics and what someone is willing to pay.
How To Sell Private Company Stock
When you’re ready to sell shares of stock from a private business, knowing what to do is helpful!
Also, you must sell these shares correctly (because there are incorrect ways).
Here’s how you sell private shares of stock.
Remember, almost 100% of the time you’ll need permission from ownership for these transactions.
Sell the Shares back to the Company
Another option is to sell the shares back to the company.
Comparatively, this is the easiest way to sell stock in a private business.
Also, the process of selling the stock is relatively simple.
The one downside to be aware of is that the company has to authorize the sale and repurchase of the stock.
Further, if other shareholders wish to sell their stock simultaneously, the company is less willing to accommodate every request.
Still, if the opportunity arises, this is one of the best ways to sell stock in a private company.
Sell the Shares to Another Investor
A fourth way to sell stock from private corporations is to sell the shares to another investor in the company.
Unlike public stocks, where the stock exchange matches you with a buyer, you must do all the legwork of finding a buyer.
Also, the private company must comply with SEC regulations, meaning they must do the following:
- Be willing to provide substantive disclosures to potential investors
- Be willing to provide specific financial statements upon request
- Be willing to provide certain non-financial company information (culture, employees, etc.)
If the business isn’t willing to offer the previously mentioned information, then you can only sell stocks to an accredited investor.
Accredited investors include the following people:
- Directors of the company
- Executive officers of the company
- Any individual with a net worth of more than $1 million
- Any individual with an annual income of $200,000 or more
- Any couple with a net worth of $300,000 or more
As you can see, more rules exist when selling stock with a private business than publicly traded companies.
Selling Shares in a Tender Offer
A tender offer is a bid someone places to purchase some or all of a shareholder’s stock in a business.
Usually, tender offers are made publicly, inciting shareholders to sell their shares for a specific price and within a particular window.
Further, the selling price is set at a premium to the market price.
Also, the price of stocks in a tender offer relies on the person selling a minimum or maximum share amount.
To put it simply, a tender offer typically sells shares of stock at a higher price than the company’s current rate.
As a result, shareholders have more incentive to sell their shares!
Selling Shares in a Secondary Transaction
Selling shares in a secondary transaction is a common way to liquidate private stock.
In this case, shares of stock are transferred from one shareholder to another in a private sale.
Afterward, shareholders can sell their equity directly to an individual or institution if the company allows it.
Note that these transactions typically require shareholders to pay capital gains taxes on the sale.
Special Considerations for Private Stock
When private companies issue stock, are there any special considerations?
Yes! A couple of special considerations include:
- Pre-IPO private stock
- Non-pre-IPO private stock
Let’s look at the differences between these two types of stock!
Pre-IPO Private Stock
When a startup company aims to go public with an initial public offering (IPO), these shares of stock are easier to sell.
These businesses connect sellers and investors interested in buying pre-IPO shares of stock.
Pre-IPO private company stock exchanges are like massive venture capital markets.
For example, an employee who holds stock in a pre-IPO private entity can list the shares on a pre-IPO exchange.
Non-Pre-IPO Private Stock
Selling stock from a private business that does not intend to go public is challenging.
Typically, private companies don’t disclose information about their business to outside investors, resulting in:
- Potential investors who are wary of purchasing stock
- Potential investors wanting to research the company
Still, the business must approve each stock sale to any outsider.
Therefore, the easiest way to sell these stock shares is to ask the issuing company how other investors liquidated their shares.
What to Consider Before Selling Private Stock
There are a few things to know before selling stocks from a private entity.
With this information in mind, you can ensure you get the most for your stock and sell it correctly.
Here are four things to consider before you sell stock from private entities.
Your Right to Sell Private Company Stock
Before looking for investors wanting to purchase your stock, check with the private company’s guidelines first!
For instance, private companies typically have specific stock-selling guidelines.
Also, most private businesses require shareholders to hold their shares or stock for a specified amount of time before they can sell.
Further, some businesses don’t allow you to resell the stock at any point.
Do your own due diligence and check with the company’s guidelines to ensure you have the right to sell your shares of stock.
Tax Implications of Selling Private Stock
Another thing to consider as you’re trying to sell private stock shares is the tax implications.
For example, you must consider the sale’s tax liability.
Sometimes, sellers can save more on taxes when they’re strategic about when they sell their private stock units.
For instance, if you sell your shares of stock within a year, you’re liable to ordinary income tax on your financial gain.
However, if you hold onto these shares for at least 12 months, you might pay a lower rate because of the long-term capital gain tax.
The Bid/Ask Spread
The bid/ask spread is the difference between what the buyer is willing to pay for your shares of stock and what you’re ready to accept.
In other words, if a potential investor agrees to buy your shares of stock at $20 per share, but you ask for $25 per share, then you have a five-dollar spread.
Also, the spread can cost you if someone is willing to buy your shares at $20 per share, but you’re asking for a higher amount.
Clearly, it’s vital to consider and know about the bid/ask spread before officially selling your stocks.
Sometimes, it’s best to hold your shares so they become more valuable.
Liquidity Needs
Finally, consider your liquidity needs before you decide to sell private stock.
In other words, how urgently do you need the money?
For instance, you may be looking for a quick sale if you have an emergency expense or a looming debt payment that you must make.
On the other hand, if you don’t need the money right away, you may be able to get a better price in the future.
Further, if you want to change your investment strategy or diversify your portfolio, waiting for the right time and opportunity to maximize your return on investment is beneficial.
When selling private company stock, thoroughly understanding the process is critical.
The Company Might be Buying Back in the Future
Depending on your role in the company, the business might already consider buying back shares.
I’ve personally been a part of several cases where a company raises an additional round of funding, and part of that round is buying back stock from old investors.
Again, you might not want to wait around, but it is something to be aware of.
Challenges with Selling Private Stock
There are a couple of challenges to know about before selling private stock.
Compared to the public exchange, selling private company shares is harder.
Still, it’s possible!
Finding a Buyer for the Stock
One challenge to know about when attempting to sell private shares of stock is that it can be difficult to find a buyer.
Unlike the public market, selling stock options from private companies requires the shareholder to look for and find a buyer.
Finding a buyer can be tricky, especially if you need help figuring out where to start.
Still, it is possible; it may take a little longer than expected.
How I’d do it:
- Talk to your company and see if they are willing to buy it back
- If they aren’t willing, ask if you can find a buyer
- Look for an investor willing to purchase
Putting a Valuation on the Stock
Another challenge to be aware of when trying to sell private stock is accurately valuing the stock.
Valuing a company’s shares of stock in the public exchange is relatively easy since you have access to the following information:
- The company’s recent performance
- Market capitalization
- Other pertinent details (new products, company layoffs, etc.)
However, you must determine the company’s current valuation and what it might be worth for private businesses.
This can be tough if you don’t have access to the financials.
Closing Thoughts on Selling Private Company Stock
Selling stock from a private company has its challenges; you must find a buyer, and companies can place certain restrictions on the selling process.
However, investing in startup companies can pay off big in the long run!
The key to selling stock options from a private company is to stay patient and learn as much as possible about the company when you own shares.
What questions are still lingering in your mind about private companies that issue stock? Let us know in the comments section below!