When you think of investing, you most likely think of the publicly-listed companies in the major U.S. stock exchanges. But what if you hold stock in a private company? It’s more common than you might think. Many companies offer stock shares to their employees or investors before going public. This guide will teach you how to sell stock in a private company.
Private vs. Public Stock
What is private stock? All stock shares represent the same thing: partial ownership of the issuing company. But not every company goes through the process of making an initial public offering (IPO). As a result, many companies that issue stock don’t appear on the major U.S. stock exchanges. Shares of these companies are known as “private stock.”
Why might a person own shares of private stock? First, some employers distribute stock shares as part of their compensation package. If you work for one of these companies, you may own shares of private stock that you could potentially cash in on.
Some companies also offer private stock to investors. Startups, for instance, might allow investors to purchase stock as a way to gain some initial capital when getting the business off the ground. Investors can wait until the company’s IPO and sell shares on the stock market or find another way to sell private stock.
How to Sell Private Stock
Selling private stock isn’t the same as selling stock on a public stock exchange. Your options will therefore be limited and may even be at the discretion of the issuing company. Here’s how to sell stock in a private company.
Gain Approval from the Issuing Company
Some companies are private for a reason. Just because a company issues shares of stock doesn’t mean they want these stock shares distributed outside of their company or investor network.
Always make sure you have permission from the issuing company before initiating a sale. This can be a helpful step since some companies can provide you with a valuation of their stock, giving you a clear idea of what your shares are worth.
Wait for the Company to Do an IPO
The easiest way to sell shares of private stock is to wait for the company to go public. Technically, you won’t be selling private stock at that point but simply participating in the same kind of trading as any other public company.
There can be strategic value to waiting for an IPO. Companies like DoorDash and Cava have seen their stock price soar after their IPO. If you currently hold shares of a private company, you might wait for the IPO, after which you could see greater profits from your shares.
Sell Shares Back to the Issuing Company
Many companies will repurchase stock from their investors. In fact, startups often rely on investors returning their shares to maintain control over their companies.
Just be aware that the company has to agree to buy back your shares. While the process itself is simple, a company might not authorize a buyback if several investors want to sell their shares at the same time. Alternatively, you could face a waiting list before you’re permitted to sell your shares.
Sell Shares to Another Investor
Selling shares of public stock is easy because the hard work has already been done for you. But to learn how to sell stock in a private company, you will have to invest some of your own time as well.
For starters, you’ll need to find a potential investor interested in buying shares of the issuing company’s stock.
Once you do, you have two options. Ideally, the issuing company will provide full disclosures to comply with current SEC regulations. This means that the company provides financial statements, information about its leadership, and any past legal disclosures.
What if the company doesn’t provide this information? Your second option is to find an accredited investor. To be an accredited investor, the individual must meet at least one of the following criteria:
- Be a director or executive officer within the issuing company
- Have a net worth in excess of $1 million
- Receive an annual income of at least $200,000 (or $300,000 for couples)
The income requirement must also be met for each of the previous two years. These requirements are a bit more challenging than selling a publicly-traded company, but they can still be a lucrative option if you cannot offload your shares through other means.
Sell Shares Through a Broker
If the process of finding your own buyer sounds exhausting, find a broker that already knows how to sell private stock.
The right broker can serve as a valuable go-between. They can assist with such things as:
- Ensuring you have the authorization and documentation for selling your shares
- Performing a valuation of the company and its stock
- Finding an accredited buyer
- Ensuring the transaction meets all the legal requirements
To be clear, not every broker will perform these services for you. Selling private stock can be a sophisticated and time-consuming process. You may only find assistance at larger brokerage firms rather than the online apps and robo-advisors that can be used to trade public stock.
Sell Shares on a Private Securities Market
You may not be able to sell private shares on a public market, but you might still be able to trade shares on a private securities market.
Even Nasdaq now offers a private market where investors can buy and sell shares of privately held companies. The advantage of these marketplaces is that it helps buyers and sellers connect and offers buyers the chance to invest in pre-IPO stocks.
The Pros and Cons of Selling Private Stock
Now that you know how to sell stock in a private company, you may be wondering if it’s a good idea. Here are the advantages and disadvantages of selling shares of private stock.
Advantages of Selling Private Stock
There are several reasons why you might want to learn how to sell private stock:
- It lets you cash in on an employer-offered stock benefit
- Some startups may be sought-after prior to their IPO
- You can earn a profit before the company goes public
Some companies may not even go public for many years. Selling shares in a private company, therefore, allows you to tap into the value of your shares without having to wait until the company makes an IPO.
Disadvantages of Selling Private Stock
On the other hand, there are some distinct drawbacks to selling private stock:
- Not all companies will authorize their sale
- It’s harder to find a prospective buyer
- Some buyers must be accredited investors
- The stock price may rise once the company makes an IPO
Private stock will have less liquidity than shares of a publicly-traded company. As a result, shareholders will find that there are simply fewer sales opportunities, even if they meet the requirements to sell private shares.
Still, these drawbacks are hardly insurmountable. In some cases, investors might even want to invest in a hot new startup prior to its IPO. Even if buyers are harder to find, they may be more motivated than buyers of public stock.
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