In an effort to retain top talent, many companies are offering their employees additional compensation packages that include stock options. That can leave you wondering how to sell stock in a private company since the process isn’t as straightforward as it is for the publicly traded stocks listed on the Nasdaq and S&P 500.
Fortunately, there are several options for selling private stock. This article will show you how to sell private stock through one of the alternatives to the public market.
Before a stock can be traded publicly, the company must go through the process of making an initial public offering or IPO.
A private stock simply refers to a company that hasn’t gone through this process. Instead of being owned by a group of shareholders, the company remains in the hands of its owner, a manager, or a group of private investors.
It’s not at all uncommon to own private stock. Those who possess shares of private stock have received them through one of two ways:
- Purchasing the stock directly
- Receiving the stock as part of an employer benefit
Many companies offer their employees some type of long-term incentive plan (LTIP) to increase loyalty or to reward the achievement of specific goals. These LTIPs typically include some type of stock option, which allows workers to purchase company stock at a discount, usually around 15%.
When the company performs favorably, shareholders may want to sell their shares for a profit. To do so, you’ll need to know how to sell private stock.
Selling private stock may not be as easy as trading public stock shares, but there are four alternatives to the public exchange. The methods listed below will teach you how to sell stock in a private company:
Maybe this sounds obvious, but one of the easiest methods might not be selling private stock at all but having the company go public. Doing so will make it easy for employees and investors to sell their shares on the open market.
Companies often resist this process since it can be time-consuming and costly. Individual shareholders may be able to convince senior management to do an IPO only through a group effort.
If you occupy a management position at one of these companies, you might consider how an IPO can increase your ability to recruit and retain star talent. With publicly traded shares, employees have more chance to profit from the stock options you offer as supplemental compensation.
The easiest way to sell shares of private stock is to simply return them to the company that issued them. Some companies even have buyback programs to make it easier for shareholders to return stock shares.
Keep in mind that as a shareholder, you may be subject to capital gains treatment if you purchased the shares with your own money. These taxes have been on the rise recently, so this may be an important consideration.
Additionally, your company is under no explicit obligation to authorize a buyback. For instance, if a number of shareholders all decide to sell their shares at once, the company may have to be selective in who they allow to sell or how many shares you can sell at once.
While you’re looking into how to sell stock in a private company, other investors may be looking for ways to buy private stock. This congruence means that you can sell shares of private stock to other individual investors.
The process can be a bit tricky, however, and depends on whether the parent company provides disclosures to potential investors, as per SEC regulations.
As long as the company is willing to provide substantive disclosures, you may sell shares of private stock to any investor you wish. But what happens if the company isn’t willing to provide such disclosures? You may still sell shares to what the SEC calls an “accredited investor.”
An accredited investor can include any of the following:
- Directors or executive officers of the company
- Individuals with a net worth of $1M
- Individuals with an annual income of $200,000
- Couples with an annual income of $300,000
As long as the buyer meets the above criteria, they may purchase stock shares regardless of whether the private company provides disclosure.
Even though you can’t buy or sell private stock on one of the major public markets, a number of alternatives have emerged in recent years. These include markets like Sharespost and SecondMarket Solutions, the latter being an acquisition of the Nasdaq Private Market.
These markets function a bit differently than the public markets represented by Nasdaq and the Dow. Investors can use these markets as networking centers, helping to connect them to prospective buyers who are looking to invest in a private company.
The good news is that most of the investors in these markets are institutional investors, and they are accredited. Plus, these markets usually complete the necessary paperwork behind the sale, which simplifies the process a bit.
Gradually, more retail investors are flocking to these private markets. This popularity may mean that sellers will need to ensure that they have the disclosure documents necessary to make a sale, similar to the process of selling to individuals.
When selling private stock, there are some additional things you may need to know. These guidelines aren’t rules, mind you, but general tips that can help you make the most of the process.
Remember, if the shares you own were given to you through some type of employer compensation plan, you can only sell your shares with prior authorization from the company.
This stipulation means that before you can sell your shares to a private individual or in a private securities market, you’ll have to notify the issuing company so they can authorize the sale.
It’s important to provide buyers with the most accurate information about your company. Ideally, you can provide the disclosure statements provided by the company itself, which will also allow you to sell shares to non-accredited investors.
But at minimum, you’ll want to provide the buyer as much information about the company as is reasonably possible, ensuring that you’re legally protected.
Additionally, the buyer should execute a non-disclosure agreement (NDA). An NDA can protect you from the accusation that you have withheld information in any way or that you misrepresented corporate data. It will also protect you from having your employer accuse you of disclosing company secrets or other sensitive data.
Securities regulations are not favorable to sellers who sell small, incremental batches of stocks. Investors who collide with these regulations can find themselves in court, where you may have to buy back the shares you previously sold. By selling larger amounts of stock, you’re less likely to land yourself in hot water with the SEC.
Now that you know how to sell stock in a private company, you’ve opened a whole new avenue for your investment plan. But how much experience do you have in selecting the right stocks or the right time to buy and sell?
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