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Guide To Selling Shares In a Private Company

Private company stock, typically issued to employees or investors, offers plenty of advantages for both the business and the shareholder. Trading private stock requires company approval and compliance with the Securities and Exchange Commission guidelines.

Private share ownership is quite a bit different than owning stock in a public company. Owning private stock can be lucrative, but trading it requires investors to overcome many hurdles. Learn more about the various factors involved in selling private stock, like the difference between pre-IPO and non-pre IPO shares and company approval guidelines.

Key Takeaways

  • Private companies issue stock almost exclusively to employees and investors.
  • Private company stock trades require the approval of the issuing company. Traders also need to seek approved buyers.
  • Purchasing private stock in a company planning an initial public offering may bring high profits.
  • Investors may hesitate to purchase private stock because privately owned companies aren’t required to release inside information.
  • SEC regulations guide private stock trades even though they don’t register private stocks.

What Is Private Stock?

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Private stocks are shares issued by a private company that doesn’t trade on public markets. This type of stock is reserved for employees and investors, often replacing some compensation through equity for cash-strapped startup companies. Issuing private stock over time can be a way for owners to transfer ownership and limit tax exposure in the case of a sale of the company.

Private companies may sell shares for many purposes, such as expansion, debt reduction, or risk diversification. Owners may transfer some or all of the ownership to shareholders over time. Employees or private investors may purchase the shares depending on the owner’s preference. Private stock may be issued for all or a portion of the company, but selling too many shares could result in the owner becoming a minority investor and losing decision-making ability.

Companies may sell private shares to three main groups of investors:

  • Large private investors: These investors are appealing to privately owned companies because institutional buyers have the capital for investments. Privately traded shares are easier, quicker, and less costly to parcel out, though there are still SEC limitations. Such sales typically have venture funding through venture capital investors. Larger private owners may have seats on the board of directors.
  • Small investors: These investors likely are handpicked people the private company owner knows. Smaller investors are usually individuals who don’t purchase large blocks of company stock, meaning they often have less of a say in company decisions.
  • Employees: Companies could offer shares to employees in lieu of higher salaries or other benefits. Usually, executives and other company decision-makers are the ones who get private stock, but companies can offer it to any employee.

Does Trading Private Stock Require Approval?

Private shareholders who are ready to sell their stock need to get approval from the company and also follow SEC guidelines. Private companies can deny any sale they want based on their ownership preferences, so selling can get a little tricky. A lot of the time, companies want their private stocks held by people they know to make sure private information and details remain private. Employees and investors may have a hard time selling shares to someone outside of the company unless they have good reasons, like needing the money to buy a house or pay for an emergency expense.

Since companies can be selective about the type of buyers they’ll approve, many shareholders ask the company’s decision-makers how others have liquidated their shares. Shareholders can receive suggestions for various ways to sell their shares, with one of the most common methods being a company buyback.

A buyback is when a company purchases stock back from investors. Companies with buyback programs consent to buy a specified number of shares and typically pay a solid price to sellers. Buybacks have advantages for both sides of the trade; companies keep control of the stock, and investors can quickly get the cash they need. Buyback programs may be limited, so those wanting to take advantage of them should act quickly.

Pre-IPO vs. Non-Pre-IPO Shares

Investors who hold shares in private companies either have pre-IPO or non-pre-IPO stock. If the company has no intention of going public anytime soon, then the shares are non-pre-IPO. These shares are usually the hardest to sell since the company wants to remain private and hold control. On top of that, many potential investors are wary of buying non-pre-IPO stock because shareholders can only offer so much information about the company. Without that valuable company insight, potential investors have no idea what sort of financial position the company is in.

Pre-IPO shares are a little different. The company plans to go public sometime in the near future, so it might be a little more relaxed about who the shareholder sells the stock to.

IPOs give companies and their stock a lot of market publicity, making IPO shares attractive to investors. The pre-IPO sales market is large and has many willing buyers. This market, by some indicators, could reach $50 billion.

There are even exchanges that specialize in pre-IPO stock trading. Employees and investors in pre-IPO private companies list on such marketplaces, some of which loan investors money for the trades.

What Are the SEC Regulations for Trading?

Private company stock can be lucrative and bring solid profits, but sellers must follow regulations if they plan to sell and realize those gains. Private company stock trades need to follow SEC regulations even though private stocks aren’t registered and aren’t traded on an exchange. It’s up to the seller to make sure they’re following these SEC regulations, so most shareholders work with securities lawyers to make sure all of the paperwork complies with the rules.

Prospective sellers must attract qualified, or what the SEC calls accredited, buyers. Accredited buyers include executives and directors at the company or investors with a net worth exceeding $1 million or an income of $200,000 for individuals or $300,000 for couples.

Selling Shares in a Private Company

T rading private shares is tricky because there’s no exchange and company information isn’t readily available. Investors can follow these steps to sell private shares:

  1. Hold private stock for at least a year. Most companies expect investors or employees to hold the stock for much longer.
  2. Seek qualified buyers with the guidance of the company. Company leaders often know potential buyers who will purchase the stock at a fair price. Investors can contact human resources or the chief financial officer to get more information.
  3. Provide information about the stock and company to prospective stock buyers. They need to share as many details as possible, being mindful of private information. Sellers may need a non-disclosure agreement.
  4. Follow contractual obligations as a shareholder listed in the private stock ownership agreement. Shareholders should know what rights they have and be aware of financial and tax implications.
  5. Decide how many shares to sell. Just like public trading, private sellers can liquidate as many or as little shares as they want. They do have to follow the same process each time they sell shares, so many shareholders try to limit the number of transactions they make.

Private and public stocks and their tradings have stark differences. Private stock owners have to navigate complex sales without an exchange and do the legwork, including securing approval of the company and finding qualified buyers. Companies that are approaching initial public offerings are easier to trade because there’s a large market for pre-IPO stocks. Regardless of the stock’s characteristics, investors must follow SEC regulations in both public and private stock trades.