Private company stock: What it is, how it works and why it’s used
A quick guide to private company stock
Most people are generally familiar with what stocks are, but often that applies to shares of publicly traded companies. However, that's not the only type of stock that exists. Private companies, which are simply those that are not publicly traded, also may have stock.
In this brief guide, we'll take a closer look at what private company stock is, how it works and why it’s used.
What is private company stock?
Private company stock means equity (i.e., an ownership stake) in a privately held company. This differs from public company stock, which is stock publicly traded on a secondary market, like the New York Stock Exchange.
Generally, anyone can freely buy or sell public company stock, whereas private company stock may be harder to come by and to transact in. Think of the difference between investing in a publicly traded company like Amazon vs. a brand-new startup:
- For the public stock like Amazon, you could open a brokerage app and become a shareholder in a few seconds.
- To obtain the private shares in the startup, you might have to take steps like persuading the founders to sell some of their equity, participating in a fundraising round or buying employee shares through a secondary marketplace such as Forge, subject to availability and transfer restrictions.
A secondary marketplace often offers the most direct route for individuals to trade private stock, but the process can still be more complex and time-consuming than with public stock. Often private companies have a right of first refusal (ROFR), meaning they have the opportunity to buy back shares before allowing a sale to another party. That, plus the process of matching a limited number of qualified buyers and sellers, completing transfer documents, and ensuring regulatory compliance often adds up to a 45-60 day process, although it depends on the circumstances.
How does private company stock work?
Typically, securities sold in the U.S. need to be registered with the Securities and Exchange Commission (SEC). However, some securities are exempt from registration if they are considered private placements, based on Securities Act Section 4(a)(2). Often, private companies use the safe harbor of Regulation D of the Securities Act to gain this exemption, such as by following rules like selling to no more than 35 non-accredited investors. So, a founder might initially own 100% of a startup, but to raise capital, they might sell private shares mainly to other accredited investors, like venture capital (VC) or private equity funds, via a private placement.1
Private companies can also issue private stock to employees, often in the form of employee stock options. In that case, employees aren't shareholders right away but have the option to purchase shares down the road at a set price. An employee might be able to exercise stock options at a relatively low price and then perhaps sell the stock if it increases in value, either pre- or post-IPO.2 Or, a company might issue restricted stock awards (RSAs) or restricted stock units (RSUs), which can become actual shares of private stock after meeting restrictions like vesting periods.3
If an employee sells stock pre-IPO, they would be selling private stock, such as to another individual who's an accredited investor and wants to gain access to the private market. If the employee held the stock until after an IPO, then it would become public stock.
Why is private stock used?
Issuing private company stock is a strategy that some privately held companies use to raise money without going into debt. Giving employees stock grants or stock options is also a common recruitment and retention tool. A startup might not be able to match the salary of a larger public company, but the private stock could have more potential upside, thereby enticing employees to join the startup.
Meanwhile, investors in private company stock might like the idea of trying to buy in early, before a company becomes public. Or, they might want diversification from public stock holdings, as private stock might not be exposed to the same headwinds, like pressure from quarterly earnings seasons. A Goldman Sachs survey of U.S. high-net-worth investors found that portfolio performance and diversification are the top reasons why individuals say they allocate to alternatives, which includes private company stock via private equity and venture capital.4
Can you buy stock in a private company?
While private company stock isn't as widely accessible as public company stock, you may be eligible to buy stock in a private company, if you meet accreditation requirements and if the company permits share transfers. Because private company shares are not listed on public exchanges, they are typically bought and sold through private marketplaces. Forge's marketplace helps connect buyers and sellers of private company stock and provides access to proprietary pricing data to help inform investment decisions.
Forge's experienced team of private market specialists is also available to assist throughout the trade lifecycle. Create an account to explore available opportunities.
Private stock FAQs
How do private company stock options differ from private company stock?
When private companies issue stock options, they're giving employees the right but not an obligation to purchase securities later on at a predetermined price. So, if the stock price rises and any requirements like vesting periods are fulfilled, an employee might be able to exercise the options by buying the private stock at a lower price than its current valuation and then selling it for a profit. In contrast, private company stock means the actual private shares, rather than the option to buy the shares.
How do you value stock in a private company?
Valuing stock in a private company isn't always as straightforward as it is with public companies that generally face more disclosure requirements.1 However, there are several ways to value private stock, such as by looking at valuations from recent funding rounds. Some databases also estimate private stock value, such as from private market trading activity.
Is private company stock worth anything?
Private company stock may hold significant value, but it depends entirely on the specific company. Its worth is typically tied to the company's growth trajectory, recent funding-round valuations and market demand for its shares. Shareholders may realize this value by selling shares through a private marketplace, participating in a company-sponsored liquidity event like a tender offer or waiting for an IPO or acquisition. However, private stock is inherently less liquid than public stock, and its value can fluctuate based on company performance and broader market conditions.1
