How to Sell Private Company Stock: A Comprehensive Guide

What Is Private Company Stock?

Private company stock is stock issued by a privately-held business to its employees and investors. Shares are not offered to the general public and aren't listed on a public stock exchange. Selling private company stock requires the approval of the issuing company. In addition, due to their often smaller size compared to public companies, private companies typically issue fewer shares of stock. That can make the shares less liquid and difficult to sell.

Key Takeaways

Selling private company stock requires company approval and a willing buyer.
Private company shares are less liquid and harder to sell than public company shares.
Pre-IPO private stock can often be sold more easily through online exchanges like EquityZen and Forge.
Valuing private company stock is crucial and can be done through the company or a private valuation service.
Private companies may have buyback programs to purchase shares from investors.

Understanding the Process of Selling Private Company Stock

Selling stock in a private company is not as simple as selling stock in a public company. Public company employees and investors can sell company shares through a broker. To sell private company stock—because it represents a stake in a company that is not listed on any exchange—the shareholder must find a willing buyer.

In addition, a sale of private stock must be approved by the company that issued the shares. Some companies may not want their shares to be widely distributed.

What's more, some employees of startups may feel pressured to hold onto their company stock as proof of loyalty. If there is a good reason for the sale—such as a downpayment on a house—a company could be persuaded to approve a sale.

Important

Individual brokers and companies facilitate investments in private or pre-IPO stocks.

Important Factors to Consider in Private Stock Transactions

Investing in Pre-IPO Private Stock: Opportunities and Platforms

Shares of a startup company that plans to go public with an initial public offering (IPO) are often easier to cash out. A number of web-based companies, such as EquityZen and Forge, connect sellers of, and investors in, pre-IPO shares.

Pre-IPO private company stock exchanges are essentially venture capital markets for the masses. An employee who holds stock in a pre-IPO private company can list shares for sale on such an exchange. Some of these secondary market sites offer loans to buy pre-IPO stock.

Tip

Before you sell private company stock, you need to get its valuation. You can obtain this through either the company itself or a private valuation service.

Navigating Sales of Non-Pre-IPO Private Stock

It is trickier to sell the stock of a private company that has no intention of going public. The lack of information about most private companies dissuades most outside investors. They can be reluctant to buy into a company that they know nothing about and cannot thoroughly research in public documents. In any case, the company may not approve the sale of its stock to outsiders.

The simplest solution for selling private shares is to approach the issuing company and ask how other investors liquidated their stakes. Some private companies have buyback programs, which allow investors to sell their shares back to the issuing company.

In addition, an insider may be able to provide leads about current shareholders or potential investors who have expressed interest in buying the company's shares.

The seller would be wise to visit a securities lawyer to make sure the paperwork is done correctly. Although private stocks are not registered with the Securities and Exchange Commission (SEC), all SEC regulations that apply to selling stocks must still be followed.

How Do I Sell Private Company Stock?

First, contact the company to obtain permission to sell your shares. Also, you'll need agreement on the manner of sale. The company can provide you with a valuation of its stock. Next, you'll need to find a buyer.

Perhaps the simplest way to sell your stock is through a buyback program offered by the company. The company can also explain how other investors sold their stock. Finding a buyer can be a challenge due to the lack of public information about a private company. To ensure proper paperwork connected with a sale, consider consulting a securities lawyer.

How Do Private Companies Issue Stock?

These days, private companies usually issue stock electronically instead of via paper certificates. Shareholders receive an email providing proof of ownership and all other details.

How Do Stock Options Work for Private Companies?

Stock options give you the right to buy a company's stock at a predetermined price within a particular time period. They're often used by a private company as an incentive for employees to stay and participate in the growth of the company.

The Bottom Line

To sell private company stock, you must get company approval and find a willing buyer. Pre-IPO private stocks can be easier to sell; online platforms like EquityZen and Forge can facilitate these transactions. Non-pre-IPO stock can be challenging to sell due to lack of public information and potential buyer hesitance resulting from lack of regulation. Consult a securities lawyer to ensure compliance with SEC regulations during the sale process. Bear in mind that private companies may offer buyback programs or provide leads for potential buyers.