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How To Sell Equity in Your Private Business: Three Paths

by / ⠀Finance / August 10, 2022
sell equity

At some point in your career, you may end up with a private business, either you worked your way up, or it was always yours. Regardless, there may be a time when you have to sell stocks or equity from your private business. So let’s talk about how to sell equity because with a private business it is a bit more complicated than normal.

What is a Private Company

To start out, let’s talk about a private company. These types of businesses are commercial enterprises that are privately held. These companies can issue out stock, but the shares, interestingly enough, are never offered to the actual public. They are also not seen on any stock exchange in public. Stock from a private company can also include shares handed out by them to their investors or employees.

A good example would be startups. When they are in the early beginnings, the company will hand out equity to make it up to their employees when money is finite. A public company also does something similar. Equity is used to motivate the employees by having compensation added to the company’s earnings.

Another difference from a normal company is that a private one does not have to supply any financial info to its investors. Plus, because a private company can often be smaller than a public one, they have a lot less stock. As such, this will cause selling to be an uphill battle.

How It Works

For the next part, we will now get into how the stock of a private company works. When a public company has shares, those who have some can go to a broker. But, for a private company, the stock has to have a willing buyer since the stake is not listed for exchange.

Also, the sale of private stock need approval by the company that issued it. Some companies prefer to keep their circle small and not have shares distributed.

Pre-IPO and Non-Pre-IPO

Startup shares that are going to go public use an initial public offering (IPO) because it is much easier to cash out. There are a number of online companies that connect sellers and investors in pre-IPO shares.

Pre-IPO stock exchanges are venture capital markets for the public. An employee who has a pre-IPO can then list out the shares for sale at one of these exchanges. There can also be market sites that will hand out loans in order to buy pre-IPO stock.

There are times when a private company has zero interest in being a public one. Therefore, it is trickier to sell the stick. Because of little information regarding a private company, this causes potential investors to flee. The best they can do is simply buy into the company and hope for the best.

An easy solution to selling private shares is to meet with the company issuing the shares and ask how investors liquidate their stakes. Few private companies allow a buyback program. On a plus side, a person working for a private company could provide possible leads to investors and shareholders who are interested in buying company shares. The smart thing to do is that the seller hires a security layer to ensure the paperwork is correct. Private stock is not registered with the Securities and Exchange Commission (SEC) but private companies still have to follow their rules.

How to Sell Equity (Private Stock)

Finally, we have gotten to the important part! How does one sell their private stock?

  1. The first thing you need to do? Make sure you can sell your shares. You will also need an agreement on the manner of the sale as well. The company provides the value of the stock. Then, you will need to find a buyer.
  2. A second option would be to just simply sell the stock back to the company through a buyback program.
  3. The private company is also able to assist you by informing you what other investors did with the stock. This can help you with what to do with the stock.

Other Information

Today, private companies will issue out stock not by paper, but through electronics. A shareholder typically receives an email that will provide all details and the proof of ownership.

Private companies also use stock options. A stock option allows you the right to buy the company’s stock at a predetermined price in a particular time frame. Commonly private companies use these to retain employees.

Conclusion

Private companies are a more fickle beast to handle than public companies. If you’re asking yourself how to sell equity, there are plenty of resources. The good news is, that most of the rules are still in place, with just a few alterations. It can be more difficult to buy and sell stocks and shares with a private company so be sure that you have a good head on your shoulders and definitely lawyer up to make sure you are not missing anything important! Other than that, go forth and buy, buy, buy, and sell, sell, sell!

About The Author

Tristan Anderson

Hello! My name is Tristan Anderson and I live in Manhattan, Kansas. I enjoy being in nature and animals. I am also a huge geek who loves Star Wars and has a growing collection.

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