Private stocks, also known as private company shares, are quite different from the publicly traded stocks most investors are familiar with. In a private company, shares are not freely traded on public exchanges, and the right to transfer shares is often restricted. These stocks are typically issued to a specific group of investors or employees and do not involve public offerings. One key difference between private and public companies is that private companies are not obligated to disclose financial data to the public, making investing in private stock a more exclusive and controlled process. In this article, we will explore how private company stock works, how it can be sold, and the key considerations for selling such shares.
What is a private stock?
A private company is quite a different affair from a public one. A private company is a company in which members cannot transfer shares, and it restricts the right to transfer the shares for a public offering. Private company stocks are not marketed on public stock exchanges; they are usually handled by the issuing corporation to a specific group of investors or even to employees. The major difference between public and private shares emanates from the fact that private companies do not have to reveal financial data to investors and shareholders.
How Private Company Stock Works
Selling stock in a private company is a lot more involved than selling stock in a public company. Public companies, employees and investors can sell their shares via a broker on an exchange; pretty straightforward. Private company stock, however, is not traded on any public exchange, so selling those shares means you have to find yourself a willing buyer.
Also, private stock sales should always be sanctioned by the company that issued the shares, as some companies do not permit access to their stock. In startups, there may also be further stipulation based on retaining ownership as a condition of employment-a so-called sign of dedication. If there is a pressing reason to sell it, such as a house down payment, then a corporation may be willing to grant the sale.
How to sell private shares?
Find a Private Buyer
Since there is no public exchange for private company stock, locating a buyer requires effort on the seller's part. Only accredited investors are qualified to buy such shares and you require the company's approval for both the sale and the buyer. It is easy to work with third-party stock brokers who can find buyers for your private stock. While selling privately is possible without a broker, the process can be just as cumbersome as selling a house yourself.
Avail Yourself of a Buy-back Scheme
Some companies have buy-back schemes in place where they repurchase their shares from employees or investors. These include fixed share purchases or tender offers, whereby you will be able to sell your shares back to the company at a predefined price. Buy-back schemes are pretty rare, though, and even if there is a scheme, there's no guarantee your shares will be bought. The price will be determined by the company, which you can't bargain higher. Furthermore, selling might depend on certain eligibility factors or distortions in supply and demand.
Secondary Market Sell
When it comes to the delivery of new shares in private companies, more often than not, they are delivered through the secondary market, which in turn attracts interested buyers to private companies. If you are a holder of those shares and want to sell them, cooperation with the experienced brokerage site will help you manage the transaction, thus protecting your interests.
Pre-IPO Shares
The other option involves selling the shares prior to the company offering the IPOs to enter the market. Usually, such selling of pre-IPO shares is done to institutional investors that show an interest in first-time company stocks. However, after the company becomes publicly traded, selling the shares can be substantially easier because the company will have liquidity and wider market exposure that the company will get out of its listing.
What should I consider before selling privately held shares?
Selling your stock in a private company is a big decision, and there are quite a few things to consider. Here are some of the key things to consider before you make a sale:
Company Restrictions: Privately-held companies will more often than not have restrictions on the selling of their shares, including company approval over any transaction of their company shares. These companies may also provide a right of first refusal through which the company can buy back your stock before you can sell those shares to other investors. First, ask your CFO or founder whether there are any buyback programs or tender offers available. If so, these have specific rules, such as the number of shares you can sell, or some holding periods.
Bid-Ask Spread: The Bid-Ask Spread is considered to be the difference between the high price that the buyers are willing to pay and the low price which the sellers are asking. One example can be given as when the highest bid is $90 and the lowest asking price is $100. This amount of spread would be at $10. This might very well translate to selling at a price lower than what you expect; this eats into the potential profit. Consider the impact of this spread on your overall return and on your need for liquidity.
Tax Implications: There are certain tax implications when it comes to selling private shares. For instance, if you exercise stock options and simultaneously sell your shares in the same transaction, you pay ordinary income tax on the difference between the sale price and the strike price. For longer-held shares, you will be liable for capital gains tax. Long-term gains are generally those realized if the securities have been held for a period of over a year and, generally, are subject to a lower rate. You can also check whether your shares qualify as Qualified Small Business Stock and thus provide you with an exemption from this capital gain tax.
With these in mind, you can be able to make an appropriate decision on selling your private company shares.
Bottom line
Selling private company stock can be a complex process that requires careful planning, from finding a buyer to navigating company restrictions and understanding tax implications. Whether you choose to sell through a buy-back program, on the secondary market, or before an IPO, it's important to weigh your options and consider factors such as liquidity, bid-ask spreads, and company policies.
In addition to private stocks, another option for investors seeking alternative investment opportunities is Compound Real Estate Bonds. These bonds offer an attractive 8.5% APY and provide a more accessible way to invest in real estate-backed assets. Unlike private stock, which can be difficult to sell, Compound Real Estate Bonds allow for anytime withdrawals, making them a flexible option for investors looking to diversify their portfolio while maintaining liquidity.
FAQs:
Can I sell my shares in a private company?
Yes, you can sell your private company shares. However, it is not as easy as selling public shares. You might have to find a buyer and get company approval to follow the possible company policy or restrictions.
How many shares does a private company have?
The number of shares a private company can have varies widely, depending on the structure of the company and its capitalization plan. Unlike public companies, private ones are not obliged to declare their total shares.
When can I sell my private shares?
You can sell private shares according to the company's policies and also as restricted in your shareholder agreement. Most of the time, you will need to obtain consent from the company, or even a willing buyer because private shares are not traded on any public exchange.
Can a private company sell shares to the public?
Yes, a private company can sell its shares to the public through an IPO. This itself is a transition wherein the company gets regulatory approvals to get listed on the stock exchange, increasing manifold the visibility and liquidity of shares.
How does equity work in a private company?
Equity in a private company represents ownership shares held by founders, employees, or investors. Unlike in public companies, equity in a private company is not traded on open markets and therefore generally has specific rights and restrictions spelled out in agreements between shareholders.
How do you value shares in a private company?
Valuation of private company shares typically depends on the comparability method of financial metrics to similar public companies, recent funding rounds, or on a discounted cash flow basis. Since the shares of private companies are not publicly traded, their valuation can be more subjective and usually requires professional appraisal.
