Can you sell shares in a private company before an IPO?
Stock options can be a great way to increase the value of your compensation package, which explains why over 14 million people participate in employee stock ownership plans.
But if you’ve ever received employee stock options from a private company, you probably already know that it’s not quite the same as having cash in your bank account.
Here’s some good news: Selling private stock is possible — and it can help you unlock the funds you need to buy your first home or diversify your investment portfolio.
Still, this can be a complicated process to navigate, so if you’re interested in how to sell stock, keep reading to learn about the options available to you, challenges you might encounter, and other considerations to keep in mind as you make your decision.
First things first, can you sell private company stock?
Ultimately, your ability to sell private stock — or as some people like to call it, "sell employee shares" — depends on two factors: whether your company allows it, and whether you can find a buyer.
For instance, your employer may have blackout dates or policies that prohibit you from selling private company stock to outside investors (more on this later).
Private shares also carry notable differences from public shares, which present some hurdles for would-be investors.
For one, private stocks aren’t found on any exchanges that trade public stock, so they’re not as accessible to would-be investors than their public counterparts. Additionally, the supply of private stock is controlled by the companies that issue them, as private shares are only offered to a select group of people (usually employees and private investors) in limited amounts. For a variety of reasons, many private companies may also be reluctant to release sensitive financial data to potential outside investors. This lack of transparency means that prospective buyers often don’t have any information to evaluate these investment opportunities.
These accessibility issues are then compounded by the fact that traditional public securities brokers can’t sell private company stock, even if they wanted to. This means you’d have fewer experts to turn to when buying or selling these assets. And to add one more hoop to jump through, the private company still must approve the sale before it can close.
But despite these challenges, private transactions are still possible for some shareholders — it might just take additional effort to secure the sale. In the next section, we’ll break down how to sell private company shares three different ways.
How to sell stock in a private company before it goes public
1. Find a buyer yourself
In this scenario, you’d play the roles of the seller and broker. As your own broker, one of your biggest responsibilities will be to find a suitable buyer. According to regulations set by the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC), only accredited investors (in the context of a natural person) can legally buy private company shares. In order to qualify, a would-be investor must have made either:
- A net worth of at least $1,000,000 (excluding the value of their primary residence),
- Incurred at least $200,000 in gross income over the last two years, with reasonable expectations to do the same this year,
- Have at least $300,000 combined gross income, if married over the last two years, with reasonable expectations to do the same this year, or
- Holds in good standing a Series 7, 65, or 82 license.
Towards the end of the transaction process, you’ll need to provide your company with the buyer’s proof of accreditation along with extensive paperwork in order to close the sale.
Even after you find an accredited investor to buy your shares, your work isn’t done yet. You’ll still need to negotiate the terms of the sale, gather the forms and paperwork needed to put together a proposed stock transfer agreement, then get your company’s approval on the sale. Once approved, you must work with a transfer agent to move the shares to the buyer and complete the transaction process.
Although you certainly have the freedom to act as your own broker, it can be a painful undertaking. Think of it as trying to sell your house on your own — possible, but not easy.
2. Participate in a company-sponsored buyback program or tender offer
Some companies will “buy back” a certain number of shares from their original holders. Others may organize tender offers — events where employee shareholders tender, or sell, their shares back to the company or to pre-approved outside investors at a pre-determined price.
However, these propositions aren’t guaranteed to happen regularly, if at all. The private company, sometimes called an issuer, decides whether these events can or will take place. And even then, the opportunity to sell your shares there isn’t a certainty.
This is because companies often set eligibility requirements that selling shareholders must satisfy before they can participate in a tender offer event, such as tenure with the company. Or in the case of a tender offer with outside investors, there could simply be too much supply and not enough demand.
Since your company is the one organizing these events, you’ll be able to leverage its resources during the transaction process, which could prove especially helpful if this is your first time selling private stock. By default, this also means that you won’t need to get approval for a sale through these channels.
But keep these two things in mind: During these events, the issuer sets the sale price, so you won’t have an opportunity to negotiate for a higher offer. And at the end of the day, companies are focused on preserving their own interests, so they may not be as receptive to your needs as a broker would be.
3. Sell private company shares on the secondary market
Compared to a primary capital raise, where the private company creates new shares to sell to investors or employees, secondary markets facilitate sales between the owners of these shares and new buyers.
By creating a platform to connect private stock sellers with interested buyers, companies like Forge help employees price their shares according to the market. Some stocks have higher investor demand than others. As a result, the time it takes to find a prospective buyer for your shares depends on the number of people interested in purchasing them.
And as with all services, you’ll pay a fee for each sale made (can be approximately 5% of the transaction amount).
This option allows sellers to work with an experienced team of licensed brokers who will prioritize your interests and help you navigate each step of the transaction process, including notifying your company of the proposed sale.
How Forge can help shareholders sell private company stock with ease
If you list your shares on Forge, we act as your broker in the transaction. Sellers are able to leverage our company’s resources and expertise to find the right buyer, ultimately helping them turn their shares into the cash needed to fund their next big purchase or investment.
Forge has built a network of over 125,000 accredited and institutional investors who are interested in buying private stock of promising companies. And if there’s a buyer, our licensed Private Market Specialists, Operations, Legal and Compliance teams handle all the legal and regulatory requirements and work with your employer to close the transaction. To begin the process, create a free account with Forge today.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES
The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc. Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.
This article does not constitute an offer to provide investment advice or service. Registered representatives of Forge Securities LLC do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services. Securities referenced in this article may be offered by Forge Securities LLC, member FINRA/SIPC.
Forge Securities LLC is a wholly owned subsidiary of Forge Global, Inc. Certain affiliates may act as principals in such transactions.
Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.