Your employer’s in an awfully good mood lately.
It’s a small company, but it’s thriving. Everyone’s worked hard to strengthen its position in the marketplace. The leaders would like to reward you and your cohorts for your loyal help. So they give you a stake in their private company: They give you stock shares (or options to get some).
On the other hand, imagine you have a relative who’s not in an awfully good mood lately, because they’re dead.
Actually, they’ve been dead a long time. But when they died, they passed some of their wealth down to you. This came in the form of shares of the privately-owned company they ran when they were alive. Someone else runs it now.
Whichever way you got them, these shares represent valuable investments. And you’re interested in selling private stock you own to put some cash in your pocket.
But when you’re dealing with privately held shares, it’s not as simple as putting them up for sale on your favorite brokerage site. Let’s talk about how to sell private stock.
What is Privately Held Stock?
Every corporation that has ever existed began its life as a privately held company. Amazon was privately owned until 1997. So was Netflix, until 2002. Even Toyota was a private company until 1999.
A privately held company isn’t publicly traded. It’s not listed on any public stock exchange, such as NYSE and Nasdaq. It hasn’t made its shares available for purchase by the general stock market.
Privately held companies come in all sizes. You might picture a family-owned diner or a small-town real estate agency as a privately owned company, and you’d be right. Most small- to medium-sized companies in the US are privately owned, by a wide margin.
You might not imagine large, world-famous companies like LEGO and IKEA as being privately owned. But both of them are.
Privately owned stock is similar to public stock in that it represents a stake in the company. While privately held stock owners can sell their shares, they can’t on the open stock market.
A private company doesn’t make its stock shares available to the general public until they have their Initial Public Offering (IPO). Many companies never get to that point. A lot of them don’t even want to. (It’s kind of a hassle.) So it’s hard to know how to sell private stock.
How is Privately Held Stock Different from Publicly Owned Stock?
The main difference between private and public stock, as mentioned, is that private stock shares aren’t sold on the stock exchange. There are a few other differences as well.
Companies go public to increase the flow of capital into their business. When they make their shares available on the stock exchange, they open themselves up to millions of potential investors. That not only (hopefully) brings in more money, but it also makes it easier to buy and sell shares. This ease of transaction is called “liquidity.”
Shares in a privately held company aren’t so liquid. Selling private stock is harder because they’re not on the stock market. Public buyers don’t have access to them. But even if it doesn’t offer shares to a wide range of investors, a company doesn’t necessarily need to go public to survive.
It’s like the difference between a Snickers bar and imported chocolate from a small factory in a remote Swiss village. You can get Snickers virtually anywhere, but you have to hunt the imported chocolate down. One company sees a lot more money flowing into their business. The other one doesn’t see nearly as much capital — but they may get more than enough to stay afloat.
Also, public companies must answer to authorities other than their shareholders. They must provide financial reports every quarter, plus another one annually, and make all reports public. Privately held companies aren’t held to as many requirements as public ones. That’s a major reason some private companies never go public.
Why Do Private Companies Issue Stock Shares?
Privately-owned companies can issue stock shares in their business. They just don’t do so on the stock exchange.
Every business starts out with an ownership structure. This can be a sole proprietorship, a partnership, or a small group of investors. Whatever it is, this party controls all ownership interest, to begin with.
At some point, business owners may decide they need to raise more capital. They do so by offering private stock shares. They have to establish how much each share is worth through a valuation process. There are a few accepted methods for that process, but we won’t go into detail here.
The ownership group holds all the initial stock shares. Down the road, they might elect to offer their employees stock shares (or options) as partial compensation. Some private startups do so as an incentive to keep their employees loyal and happy.
Private companies may also try to sell stock shares to outside investors. That’s when the valuation process becomes especially important. Owners have to convince outside interests why their shares are worth what they say they are.
Privately held stock shares can be handed down to family members as an inheritance. They can be willed to whatever third party the owner wants.
Deciding to Sell Private Stock: Getting Permission
However you obtained your shares, let’s say you’ve decided it’s time for selling private stock. What can you expect? To begin with, a couple of snags.
You can sell publicly held shares at will, whenever you want. That’s not the case with private shares. To sell those, you need to get permission from the company that issued them. Whether you got them as an employee or not, the company has to approve your proposed sale.
This effort might not be that difficult if you’ve never worked for the company and obtained your shares some other way. If you have worked for them, you may face issues.
Since some private companies offer shares to employees as a reward for loyalty, many workers feel pressured to hang on to them. If you’re employed by the company you own shares in, you may be concerned about fallout from selling them. And you might not even get the chance.
Company leaders might say “no” for a variety of reasons. They might not want their shares to be distributed beyond a limited group of shareholders. They may not want to answer to strangers about their operations. Their reasons for denying the sale may be personal or petty. But they have the right to decline your request.
That said, some private companies are warming up to the idea of allowing their shares to be sold.
For one thing, allowing employees more options in their stock holdings is a good HR policy. Say you work at this private company for 10 years. Over that time, you may experience major life events: getting married, starting a family, buying a house or car, and so forth. Leaders at your company would be well-served to sympathize with your life changes. They’d understand you need the financial flexibility to get through them.
To that end, one strategy to get permission is to tell your company’s CFO why you need to sell your shares. They likely understand how it feels to put a large down payment on a house or car or to pay for emergency expenses. So they’re more likely to get your reasons for wanting to sell.
So, let’s say the company you own shares in is a bunch of stand-up folks and will let you sell them. Here’s how to sell private stock.
Sell It Back to Them
By far, the easiest and most common solution is to sell shares back to the company.
More businesses see stock buybacks as opportunities to reinvest in themselves. When you sell a share back to a company, the number of its outstanding shares goes down. That means all the other shareholders’ stakes go up.
Many businesses, in fact, have instituted stock buyback programs. They tell shareholders that they’ll buy back a preset number of their shares. It’s convenient for private shareholders because they could get instant buyers who’ll pay a reasonable price.
Under this program, the company will tender an offer for your stock shares. You’ll have the option to accept or decline it. But since the company has set limits on how many shares they’ll buy back, you’ll have to act quickly. As soon they’ve bought back the number of shares they agreed to, the program ends.
If the privately held company doesn’t have a buyback program, you can still approach them with your request. They may say no, for some of the reasons we outlined above.
When the company agrees to buy your shares back, you’ll want to be relatively low-key about it. The company might worry that if other shareholders learn about your deal, they’ll want to sell back their shares too. The financial officer may not have the resources (or the desire) to handle those requests.
Sell Shares to Another Investor
If the company won’t buy your stock but has permitted you to sell, you can look for another investor to sell to. With this strategy, you have to make the effort to locate potential buyers yourself. You don’t have the automatic market of the stock exchange to help you.
There are a few complications to this method. The Securities And Exchange Commission (SEC) has strict regulations for private share trading. The SEC says the company must provide certain information to potential investors, even if you’re the party selling the shares. This information includes financial statements and other data the company may not want to reveal.
If this is the case, you’ll have to target an accredited investor as defined by the SEC. This is an individual who’s worth at least $1 million and earns $200,000 annually ($300,000 if they’re married).
The SEC favors accredited investors because their high net worth implies they know what they’re doing. They’re more trustworthy when it comes to investing in private companies than others. This is especially important because the legal system has dealt with many private stock transactions that have gone wrong — and more often than not, judges hold the seller responsible.
How to find accredited investors? Some of them may be on the executive board of the company you own shares in. If that’s not an option, you can also buy lead lists of accredited investors. You can find them on the internet.
Once you find an accredited investor, you have to pitch them on your stock. Make phone calls, write letters, prepare presentations — whatever works best for you. You may even take out a newspaper ad, as long as you mention it’s for accredited investors only.
Find a Private-Security Market
Bit by bit, companies are making the private securities market more open to retail investors (i.e., you). Nasdaq purchased one such company and renamed it the Nasdaq Private Market. The company Nasdaq partnered with for this venture, SharesPost, has since split off to run its own private securities service.
These services try to match sellers of private shares with potential buyers. Most buyers on these services are institutional investors, and all of them are accredited. They offer selling opportunities to individuals and companies, as well as other institutional investors. A big advantage to these markets is that they complete transaction “paperwork.”
Both these brokers specialize in pre-IPO shares trading. This is when a private company releases some of its shares shortly before going public. Institutional investors can snap up pre-IPO shares at significant discounts on post-IPO prices.
Private securities markets are gradually allowing retail investors into their fold. This is because retail investing has grown substantially in recent years. It commands more market share than it used to, and private markets want their business.
Some Final Tips
If you’re free and clear to sell your private shares, consider these suggestions on how to sell private stock:
Be Honest But Discreet About Disclosing Information
You may not (in fact, probably won’t) have access to your company’s annual report to show your buyer. So the information you give them needs to be airtight and accurate. This is crucial to ensure you’re legally protected. Additionally, the buying party should execute a non-disclosure agreement. This protects you from potential claims from both sides: that you withheld or misreported info to the buyer, and that you disclosed company secrets.
Don’t Sell Private Stock As Soon As You Get It
Wait until you’ve owned private shares for a while before you offer them for sale. Analysts suggest you should hold on for at least one year before selling. This is to show that you have an abiding interest in holding on to the stock for a time. It’s important to not look like you’re just interested in selling your shares to make a quick buck. (Especially if you work at the company yourself — it’s a very bad look.)
Believe it or not, it’s less risky to sell larger amounts of stock than several individual small ones. Securities regulations are aligned against sellers who break their shares into smaller chunks. If you go to court for this transaction, you’ll likely be required to buy those shares back. Sell private shares in large increments to avoid that fate.
Gorilla Trades Helps You Go Public
Now that you’ve learned how to sell private stock, Gorilla Trades can help you find great public stocks to support your holdings. Get started with a free trial today.