Can you sell shares in a private company before an IPO?
Granting equity compensation is a common component of employee compensation packages, which helps explain why millions of people participate in employee stock ownership plans.2
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 keep reading to learn about the options available to you, challenges you might encounter and other considerations to keep in mind.
What is private stock?
Private stock represents equity ownership in a company that is not publicly traded on a stock exchange. Unlike public shares, which can be bought and sold freely throughout the trading day, private stock is illiquid by nature. Transactions aretightly controlled by the private company, and any transaction is subject to both regulatory requirements and company-specific transfer restrictions.
Employees, founders and early investors are the most common holders of private stock. While these shares may have an estimated “fair market value” or attributed “book value”, converting that value into cash requires a deliberate process.
Can you sell private company stock?
Ultimately, your ability to sell private stock 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. Private stocks aren't found on any exchanges that trade public stock, so they're not as accessible to would-be investors as their public counterparts. Additionally, transaction is private stock are 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 information to evaluate these investment opportunities.
These accessibility issues are then compounded by the fact that traditional public securities firms do not specialize in private markets. This means you'd have fewer experts to turn to when buying or selling these assets. The private company must also 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 intermediary. 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 and Exchange Commission (SEC), only accredited investors can legally buy private company shares.3 In order for a natural person to qualify, a would-be investor must meet at least one of the following criteria:
Net worth. At least $1,000,000, excluding the value of their primary residence.4
Individual income. At least $200,000 in gross income in each of the last two years, with reasonable expectations of the same in the current year.5
Joint income. At least $300,000 in combined gross income (if married) in each of the last two years, with reasonable expectations of the same in the current year.6
Licensure. A Series 7, 65 or 82 license held in good standing.7
Toward 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. Once approved, you must work with a transfer agent to move the shares to the buyer and complete the transaction.
Although you certainly have the freedom to act as your own intermediary, it can be a complicated 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, 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 decides whether these events can or will take place. And even then, the opportunity to sell your shares isn't a certainty.
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. 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 separate approval for a sale through these channels.
But keep two things in mind: During these events, the private company 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 the interests of all shareholders. Also issuers may not be as receptive to providing logistical support as an independent representative 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 current owners of existing shares and new buyers.
By creating a marketplace to connect private stock sellers with interested buyers, companies like Forge help employees determine a fair price for their shares based on market interest. 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.
You should be aware that you'll pay a fee for each sale made. The Forge transaction fee for direct secondaries is typically 2-4% and depends on several factors including transaction size, market dynamics, investment types and customer lifetime transaction volume, among other considerations. For alternate investment structures, the fee can range higher than that of direct secondaries.8
This option allows sellers access to an experienced team of FINRA registered Private Market Specialists who can help navigate each step of the transaction process, including notifying your company of the proposed sale.
Tax considerations when you sell private stock
Selling private stock can trigger meaningful tax liabilities, and the amount owed depends largely on the type of equity and how long you've held it. For example, holders of Incentive Stock Options (ISOs) face different tax treatment than those with Non-Qualified Stock Options (NSOs), and the holding period determines whether gains are taxed at short-term or long-term capital gains rates.
Some shareholders may also need to account for Alternative Minimum Tax (AMT) exposure, particularly when exercising ISOs. Because the rules are complex and vary by individual circumstances, working with a qualified tax advisor before initiating a sale is strongly recommended.
How Forge can help you sell private stock
If you list your shares on Forge Markets, the marketplace's user-friendly, self-directed experience makes it straightforward to submit asks and manage documents. Forge has built a network of over 125,000 accredited and institutional investors who are interested in buying private stock of companies.9
When a buyer is matched, an experienced team of Private Market Specialists is available to assist throughout the process. To get started, create an account with Forge today.
FAQs
How long does it take to sell private stock?
The timeline varies depending on buyer demand and the company's approval process. Some sales close in a few weeks, while others can take several months. Working with an established marketplace like Forge Markets can help streamline the process by connecting sellers with a broad network of interested buyers.
Do I need my company's permission to sell private stock?
In most cases, yes. Private companies typically require approval for secondary transactions and often hold a Right of First Refusal (ROFR), which gives them the option to purchase the shares before an outside buyer can. Review your stock agreement or consult your company's equity administration team for specific policies.
Can I sell private stock if I no longer work at the company?
Former employees can typically sell their vested shares, provided the shares were exercised before any post-termination exercise deadlines and the company's transfer restrictions allow the sale. Eligibility varies by company, so reviewing your equity agreement is an important first step.