There are two common ways to acquire stock in a privately held company. You may receive shares from your employer as part of your compensation, or you may be an early investor.
Either way, selling your shares is not as straightforward as selling stock in publicly held companies. Private company stock is offered exclusively and in limited amounts, usually only to employees and a small investor group. Unlike public stocks, the sale of privately held stock must be approved by the issuing company.
How Stock Options in a Private Company Work
Stock options in a private company are an incentive to employees during the startup phase. Stock options give the employee the right to purchase the stock for significantly less than the market value. The stock options are usually valid for a set period of time and may be contingent on the employee continuing at the company.
How Private Companies Issue Stock to Raise Capital
Private companies issue stock to raise funds. In this case, the company will sell stock to private investors. Many also give stock to employees to promote loyalty to the company.
For investors, the primary incentive is that the startup funds can grow at a high rate of return. If the company holds a successful IPO the stock can see significant gains. For employees, stock can compensate for long hours or a low starting salary.
While private stock options are available in startups, they are also available in relatively large privately-held companies such as Ola Cabs, whose last round estimated valuation was $4.44 billion, and FormEnergy, with an estimated valuation of $1.23 billion.
📘 Interested in pre-IPO Investing? Learn how it works, can you purchase pre-IPO shares as a retail investor, and whether or not you should:
Pre-IPO Investing: How It Works, Can (And Should) You Do It?
The Difference Between Private Company Stocks and Public Company Stocks
Both private and public company stocks represent ownership of a small fraction of a company. There are still many differences. These include:
- Private companies don’t have to to issue quarterly and annual financial reports to investors and the public.
- Private companies are usually significantly smaller than publicly-traded companies, which means fewer total shares of stock are available.
- Public stock exchanges like NASDAQ or the New York Stock Exchange don’t sell private stocks.
- Private stocks are usually less liquid and more difficult to sell.
- Fewer brokers will work to help you sell private company stocks.
- The company to which the stock belongs must approve the sale.
☝️ Shares in privately held companies are not registered with the Securities and Exchange Commission (SEC). However, the purchase and sale of private stocks are governed by the same SEC regulations as public stocks.
All of these factors, taken together, mean that investors are less likely to choose to hold private company stock unless it is a company they are personally involved in as an owner, an employee, or as a seed investor.
If you need to sell private company stock, you’ll need to value the stock and then consider sale options.
How to Value Stock Options in a Private Company
There are different ways to value private company stocks. If you have stock options in a company, you will want to value the stock before purchase.
Private company stocks do not trade on a public exchange, so the market has not established a value. The most common valuation method is to compare the value ratios of a comparable publicly-traded company. This gives a realistic stock valuation in most cases.
If the company has recently sold shares to a venture capital investor, the per-share value of that investment can help to establish a valuation.
Other methods to value private company stocks include internal rate of return (IRR) and discounted cash flow analysis.
IRR analysis, commonly used in oil and gas companies as well as many private equity firms, uses many complex factors. This includes the company’s debt and leverage as well as its business performance, the strength of the economy, and the project’s positioning within the market.
Discounted cash flow analysis to value private company stock involves complex math and financial modeling to determine the current value of a stock based on its return in the future. The complex nature of this model means it’s not the best choice to value private company stock unless a company provides the discounted cash flow analysis.
Once you have the stock value, you can choose whether to exercise stock options in a company. If the company shows good long term-growth and the stock options are priced below the current market value, it may be a good investment, especially if the company intends to go public.
How to Sell Stock in a Private Company
In order to sell stock in a private company, you will need permission from the company. Depending on the company structure, some employees may feel pressure to hold onto their stock as a demonstration of loyalty. However, in the case of exceptional reasons, like downpayment of a house or family emergency, it is often possible to get permission to sell privately-held stock even as an employee of the company.
If you’re ready to sell stock in a private company, you will need to find a buyer along with getting the company to agree to the sale. That means you act as a broker of the transaction, locating both the buyer and getting company approval. The challenge in locating a buyer is that company information is not publicly available, making it difficult for potential investors to research the company and understand its current valuation.
Even with the valuation methods above, unless the buyer has inside knowledge of the company, such as a fellow employee or investor wanting to purchase additional shares, it can be difficult to find a buyer, especially if the company is not widely known.
Some companies do offer a stock buyback program in which they will agree to buy a predetermined number of shares of the stock at a fair price.
Pre Initial Public Offering (Pre-IPO)
A company that plans to go public will sometimes raise cash through a pre-IPO offering. This can be a large and lucrative venture capital market, with investors clamoring to get in before the IPO if the company is well known and the IPO is widely anticipated.
If the private company stock you hold is in a company that plans to go public, you can sell your shares on a number of brokerages that connect investors and sellers of pre-IPO stocks. Here are a few brokers to look into:
For companies that have no plans to go public, your best option is a buyback program, selling the stock to an employee or original investor.
Steps to Sell Private Company Stocks
Here is the checklist to follow if you want to sell private company stocks:
- Is there stock valuation? If not, you will need to obtain valuation either with the company or through private analysis.
- Is there a buyback program? If so, you could consider selling your stock back to the company at a fair price.
- Do you know any interested investors? Maybe a co-worker wants more shares, or a friend has been excited about the company for years. Try to locate a buyer yourself.
- Get the company to agree. Whether you plan to sell to another private individual, back to the company, or online, you will need to speak with the company about your desire to sell and obtain their permission for each specific type of sale.
- Consider pre-IPO marketplaces. If the company approves, you can contact any of the pre-IPO marketplaces listed above about selling the private company stock to an investor through their site.
These steps should help you to sell private company stock. Depending on the company, the number of shares, and financial details, this could be as simple as a one-step buyback program, or it could be a more involved process. Private company stocks can be a valuable asset, and when it is time to liquidate the stock, with a little time and attention you can obtain their full value.
📘 Interested in buying stock in a private company? See all the ways in which you can acquire shares in companies with high potential at bargain prices: How to Buy Pre-IPO Stock
Yes, privately-owned companies can issue stocks and sell shares.
You can sell shares in a private company through a buyback program, by locating an investor to purchase the shares or through online exchanges like Forge Global.
It depends. Some companies require you to hold the shares for a set period of time. In that case, you can’t sell them right away. In the case of stock options, you would first need to purchase the private shares before you can sell them.
Investing in stock always comes with risk. Since private stock is significantly less liquid than public stock, it carries additional risk. You should only invest in your company’s private stock if you have looked at the valuation and see a realistic path to significant growth for the company in the current and future markets. Before you buy the stock, ask about buyback options and stock sale policies.
Do you have any questions about selling stock in a private company? Let us know in the comments!