What’s the difference between a private company’s stock and a public company selling shares? Buying and selling shares publicly and privately aren’t two sides of the same coin; they’re very different. If you have received private shares from your employer or inheritance, you may wonder how to turn your equity into cash. Read on to learn how to sell private shares.
What is a private stock?
A private company refers to a privately held commercial entity. The company can issue stock. But unlike public offerings, not anyone can buy private stocks and shares. Private company stocks aren’t listed on public stock exchanges or offered to the general public.
The main difference between public and private shares is that private companies do not have to provide financial information to investors and shareholders.
So, how do you get public shares and stock? Generally speaking, only an accredited investor can buy private stocks and shares. However, you don’t have to be an accredited individual investor to own private shares. Private corporations may issue shares to employees, or you may inherit or receive private shares as a gift.
Can a private company sell shares to the public?
You won’t be able to buy shares on the public exchange. Typically, private startup companies use equity compensation programs to pay employees during the early stages with limited capital. These programs also motivate employees by tying their earnings to the company’s success.
Private companies do not need to comply with the securities and exchange commission SEC regulations. Therefore, the company that issued the shares doesn’t need to provide financial information to investors and shareholders. Investors cannot compare accounts to make informed decisions, so private companies can only sell to accredited investors.
How many shares does a private company have?
When you set up a private company, the first shareholder (usually the founder and managing director) chooses how many shares to issue. Legally, you have to issue at least one share, but there is no upper limit—typically, it’ll be the number of shareholders you want in your privately held company. Additionally, businesses need to consider future funding opportunities.
How does equity work in a private company?
Equity is another word for shares or stocks. When a private company issues stock, shareholders own part of the company. For instance, if a company has ten shares, and you buy 2 of the company’s stocks, you will own 20% of the business. Generally speaking, we buy and sell private company stocks in even numbers, such as 20, 40, or 60, to make it easier to determine profits.
Buying stocks in private companies is not easy, so the shareholders tend to be chosen by the company. For instance, they could be business partners or employees, each with a stake in the company.
Can I sell my shares in a private company?
Yes, you can sell private shares. However, unlike public shares, selling private shares is not as easy.
As the shares are not regulated or listed on public stock exchanges, it’s up to the individual seller to find a buyer. There are a few brokers to help sellers find a buyer. However, you will likely need permission from the issuing company. Alternatively, you may need to wait for the company to go public before selling. We’ll explain how to sell shares of private companies further on.
Why might you wish to sell private company shares?
Anyone might wish to begin selling private stock to generate cash flow and raise capital investment. As an employee with private shares, you may want to sell to buy real estate without a personal loan or cover student loans.
If you need approval before selling the shares, you might need to offer a valid reason or invest the capital rather than place it in your savings accounts.
How do you value shares in a private company?
Without a public trading market, it’s often quite challenging to value stocks in private companies. Shareholders must use various methods to determine the approximate value of their shares. Typical approaches to value shares include:
- Valuation ratios.
- Discounted cash flow (DCF) analysis.
- Internal rate of return (IRR).
- Comparable company analysis.
The comparable company analysis is the most popular method. It involves comparing the company to a public business.
Both companies should be relatively the same size with similar business operations.
When can I sell my private shares?
There is no legal or official schedule after investing in stocks. However, after receiving your shares, you should aim to wait for at least a year before selling. Private companies frown on those who sell their shares quickly — known as, trying to “flip” the stock for a quick profit. Holding onto private shares for a year won’t raise eyebrows, and your stock may even increase in value.
How to sell private shares?
How do you sell private shares without public trading on the stock market? While trickier, it’s not impossible to sell traded stock privately. Here are a few options.
Find a private buyer
Without a public exchange, it’s the seller’s responsibility to find a buyer. Only accredited investors may buy private shares. Plus, you’ll need the company’s approval before completing the sale — they must approve your selling stock and the buyer.
To make the process easier, you might enlist the help of third-party stock brokers to find a buyer. You can work without a broker, but private markets are tricky to navigate. Think of it like selling your house yourself. It’s possible but not easy.
Participate in a buy-back scheme
Some companies will buy back shares. A buy-back program will typically purchase a set number of shares or organize tender offers — where employees can sell their shares back to the company at a predetermined price.
However, buy-back schemes and tender offers are rare. The company decides whether or not to organize such schemes, and even then, there is no guarantee that your shares will sell.
You won’t need their approval to sell in these instances, but you also may not meet eligibility criteria. Or, there may be too much supply and not enough demand — meaning that there aren’t any potential shareholders to buy stock from you.
Moreover, the company will set the sale price, and you won’t get the opportunity to negotiate higher prices. Companies focus on preserving their own needs and may not be as receptive to your needs as brokers.
Sell on the secondary market
When a private company sells new shares to investors or employees, they do so on the secondary market. The platform connects private companies offering shares with interested buyers. If you’re interested in selling your shares, you might work with an experienced brokerage site that will prioritize your interests and assist you throughout the transaction.
Pre-IPO shares (initial public offering)
Alternatively, a company can transition to a publicly traded company via an initial public offering IPO. Pre-IPO stocks sell to institutional investors who are often attracted to first-time company stocks easier to sell. The pre-IPO market is fairly substantial, and, with the ability to list stock publicly, it’s far easier to sell.
What should I consider before selling privately held shares?
Selling shares of a private company is a significant decision that depends on your personal finance, among other factors.
1. Your company’s restrictions
Often, you cannot sell private company shares without the company’s permission. If you’ve received an employee stock option and wish to sell, you might need to obtain approval first — and the company has the right to refuse, which means it can buy back your stock before other potential investors do.
The first step is to ask your CEO or founder whether they plan to run a buy-back program in which they set the rules. If they offer approval for you to sell your shares of stock to a buyer, you can go ahead with the transaction.
2. The bid-ask spread
Determine the bid-ask spread if you plan to sell your stock offerings through a secondary marketplace. This is the difference between the highest bidding price to buy and the lowest price to sell.
For instance, if the asking price is $100 and the highest bid offer is $90, the spread is $10. While the spread may not seem huge, when multiplied by the number of shares you wish to sell, you could miss out on a potentially significant profit.
3. The tax implications
When calculating your total gains, you must consider taxes. You must pay income tax on your gains when you exercise stock options and sell shares in the same transaction.
However, if you sell your shares before exercising stock options, you will have to pay tax on the difference between your strike price (amount per share) and the fair market value. You may also have to pay capital gains tax on any value increases.
4. Liquidity needs
When selling your stock picking, you should consider the value of having cash in your bank accounts versus the theoretical value of stock increasing. Think about why you want to liquidate your shares. It might be worth it if you have a specific reason, such as paying for a wedding or diversifying your holdings.
However, if you think the value will continue to increase, holding off selling could result in better financial gains. Pay attention to the market’s news to determine the right time to sell.
Selling shares and stock from privately held companies might be trickier than public shares, but it’s not impossible. As with any transactions, consult your financial advisor and consider whether it is the best time to sell or whether you’ll benefit by waiting for the value to increase.
Frequently asked questions
Can you sell shares without a broker?
You can sell privately traded with or without a broker. A broker may look after your best interests and help you find a buyer offering a reasonable price. However, you can also use brokerage platforms to buy and sell shares with accredited investors.
Can you sell shares anytime?
With privately held stocks, you can sell at a time that suits you. However, you will need permission from the issuing company or wait for them to host a buy-back program before selling. Often, if you have a valid financial reason to sell, the issuing company will approve.