Selling private shares of a company and selling public shares of a company aren't exactly two sides of the same coin.
In fact, there are big differences between public and private stock ownership and significant hurdles to cross for shareholders looking to sell privately-held stocks.
What's the best way to sell private shares of a company, especially if you want to sell right now? Here's a primer on private company shares and how to sell them quickly, legally and efficiently.
What Is a Private Company Stock?
Shares of private company stock are exactly what they sound like -- shares of a private company issued to investors and often to employees of the company.
Companies place a high premium on private shares of stock. They use those shares as a recruitment tool to attract high-quality employees when cash is also at a premium.
By linking private shares of stock in an employee compensation package, private companies are giving employees skin in the game. The better the employee does, the notion goes, the better the company's private shares of stock will do.
Private company stocks very from publicly-traded stocks in multiple ways:
- Unlike public stocks, private stocks don't have to be registered with the U.S. Securities and Exchange Commission. That means private stocks aren't scrutinized by regulators, as are public company stocks.
- Unlike public stocks, private companies aren't required by law to issue regular quarterly and annual financial (i.e. earnings) reports to investors or to the public. That scenario might be too "private" for stock buyers, who typically require earnings reports and transparent financial analysis when vetting stocks to buy.
- Unlike publicly-traded stocks, private stocks aren't sold on a public exchange like the New York Stock Exchange or Nasdaq. They're sold on secondary markets where it's not always easy to find a qualified buyer.
- Private companies are usually significantly smaller than publicly-traded stocks, and thus have fewer shares to sell. That makes them less liquid than public stocks and thus often more difficult to sell.
- There are fewer brokers to work with to sell a private stock. Often, you have to search far and wide to sell private shares of stock, and the private company that holds the stock must approve the sale.
How to Sell Privates Shares of a Company
There are myriad obstacles to selling private company stock.
For example, since the private stock's name and price isn't listed on any exchange, it's up to you, the seller, to find a willing buyer for your shares of stock.
Additionally, the private company may not want you to sell your private shares of stock, especially if you're an employer. When employees hold shares of their company's stock, they're often pressured by company management to hang on to their shares as long as possible, as evidence of your loyalty to the company as a private shareholder.
You can, however, sell your shares in a private company in the following scenarios:
Sell Your Shares Back to the Company That Issued the Stock
This is the most common way for sellers to shed their shares of private company stock. Often, companies will engage in share buyback programs where they'll agree to purchase a predetermined number of private stock shares, giving sellers a ready-made buyer for the stock who'll likely pay a fair price in the transaction.
You'll need to act fast, though, just because a company opts to authorize a share buyback program doesn't guarantee they'll buy your stock. Be ready to sell when word gets out on a private company stock buyback program.
Through a Pre-Initial Public Offering Sale
When a private company wants to raise cash, it can transition to a publicly-traded company via an initial public offering. IPOs shine a spotlight on a particular company stock being traded for the first time, and thus make selling IPO shares easier to sell. The pre-IPO market is substantial in size, with no shortage of interested buyers. Some estimates of the size of the pre-IPO market
With a pre-IPO, the seller can list his or her stock publicly, making it much easier to attract buyers.
Through Non-Pre-IPO Private Stock
If the stock owned by a private stockholder isn't going public anytime soon, selling shares of that stock becomes more of an uphill climb -- but it can be done.
With private shares of stock, there's no listing of any information on the stock and no share price to list as well. Also, private shares of stock can't be sold unless a green light is given by the company's high echelon decision-makers, who may not want the stock sold to company outsiders.
What private companies often do, however, is purchase the private shares themselves, often in stock buy-back programs. Or, if the sale is approved, the company can steer the seller toward qualified buyers that management approves of and close the deal that way.
By Appealing to the Company With a Declaration of Why You're Selling the Stock
While private companies do hold the cards in the form of share price sale approval, most aren't heartless ogres who'll never let you sell your private shares of company stock.
If you submit a sales request that includes why you're selling the stock --i.e., you're getting married or buying a home, for example, the company may well approve your share price sale.
Private companies want to hold on to top talent just as much as public companies do, and if you give them a good reason to sell your shares, chances are they'll go along to keep you in-house and motivated to keep producing for the company.
A Private Stock Sale Action Plan
Once you've decided to sell your private stock shares, you're pretty much on your own.
There is likely no stockbroker, no stock exchange, and no public information on your company to attract buyers.
How to navigate a trickier stock sales market when you're on the private side of the street? Take these action steps:
Put the Word Out You're Selling Your Stock
Work with the company whose stock you're selling to find qualified buyers. Chances are the higher-ups at the company will know who's likely to be interested in buying the stock and who will pay a fair price to buy the stock.
Start with the firm's investor relations officer (if it has one) or the company treasurer or chief financial officer. The company's human resources staff also can be invaluable in getting you on the right path, right away, in finding a buyer.
Be Transparent as Possible
You want to be as forthcoming as possible with potential buyers. After all, the more information you provide on the company and its stock, the more your buyer will trust you and feel comfortable buying your shares of stock. Most buyers will know something about the stock, or they wouldn't be interested in the first place.
It's your job to disclose as much information as possible, without giving away any company trade secrets. A non-disclosure agreement signed by the buyer should take any worries off the table.
Know Your Stock Ownership Contract
You'll likely have a company shareholder agreement that will provide insight and direction on what rights you have as a shareholder. There will be various finance and tax issues involved in the sale of the stock, as well as language on the limits of what company information you may divulge to potential buyers of your stock.
Thus, it's a good idea to review your private stock ownership agreement thoroughly and make sure you're following the rules when selling your private shares of stock.
Wait a Year to Sell
Once you buy shares of a private company's stock, know that trying to "flip" the stock for a quick profit will get the attention of the private company's executives, who take a dim view of quick stock resales.
It could also draw the attention of regulators who prefer to see private stock shareholders hold on to a stock for a while to properly demonstrate intent to hold the stock.
While there is no agreed-upon timetable to sell private stock shares, hanging on to them for one year won't raise any eyebrows and your stock may even grow in value during your "holding period."
Aim For Accredited Investors
It's not uncommon for courts to side with buyers in cases of improprieties over private stock sales gone wrong. Often, a judge will reprimand a stock seller for cutting a deal with unsophisticated investors who didn't know what they were getting into with the purchase of private stock.
Stay away from any legal wrangling and work strictly with accredited investors, i.e. well-off buyers who have $1 million in net worth and $200,000 in annual income ($300,000 with a spouse.) High net-worth buyers (often they're executives at the company which issued the stock) are usually wiser to the ways of Wall Street than the general public, and regulators and companies who issue private shares of stock prefer those individuals buy private stock. All too often, the legal system takes the same view.
The Takeaway on Selling Privates Company Stocks
There are substantial differences between private and public stocks, especially in the way private stocks are sold.
Consequently, it's up to you, the private stock shareholder to know the rules of the road when you're looking to sell private shares of stock.
That's not only the best way to shed your private company shares, it'll also significantly curb the odds of regulators, courts, and upset private company stock issuers taking a harsh view on your stock sale, and keep you out of harm's way in the process.