What Is Private Company Stock?
Private company stock includes shares issued by private companies to their employees or investors. For example, startups often use equity to compensate employees during the early stages when cash flow is limited. Public companies also use equity compensation programs. These programs are designed to motivate employees by tying a portion of their pay to the company’s earnings.
Key Takeaways:
- Private company stock is a type of stock offered exclusively by a private company to its employees and investors.
- Unlike public stocks, the purchase and sale of private stock must be approved of by the issuing company.
- Buying private stock of a company that intends to go public can be a lucrative investment strategy.
- Private companies are not required to provide inside information to the public, so investors are often hesitant to buy private equity.
- Although private stocks are not registered with the SEC, SEC regulations still apply to their purchase and sale.
How Private Company Stock Works
Selling stock in a private company is not as simple as selling stock in a public company. Employees or investors can sell the public company shares through a broker. To sell private company stock—because it represents a stake in a company that is not listed on any exchange—the shareholder must find a willing buyer. In addition, the company must approve the sale.
A sale of private stock must be approved by the company that issued the shares. Some companies may not want their shares to be widely distributed. In addition, some employees of startups may feel pressured to hold onto their company stock as proof of loyalty. If there is a good reason for the sale—such as a downpayment on a house—a company could be persuaded to approve a sale.
Individual brokers and companies facilitate investments in private or pre-IPO stocks.
Special Considerations
Pre-IPO Private Stock
Shares of a startup company that plans to go public with an initial public offering (IPO) are often easier to cash out. A number of web-based companies, such as EquityZen and SharesPost, connect sellers of and investors in pre-IPO shares.
Pre-IPO private company stock exchanges are essentially venture capital markets for the masses. An employee who holds stock in a pre-IPO private company can list shares for sale on this market. Some of these secondary market sites offer loans to buy pre-IPO stock.
Non-Pre-IPO Private Stock
It is trickier to sell the stock of a private company that has no intention of going public. The lack of information about most private companies dissuades most outside investors, who are reluctant to buy into a company they know nothing about and cannot thoroughly research in public documents. In any case, the company may not approve the sale of its stock to outsiders.
The simplest solution for selling private shares is to approach the issuing company and determine how other investors liquidated their stakes. Some private companies have buyback programs, which allow investors to sell their shares back to the issuing company.
An insider may be able to provide leads about current shareholders or potential investors who have expressed interest in buying the company’s shares. The seller would be wise to visit a securities lawyer to make sure the paperwork is done correctly. Although private stocks are not registered with the Securities and Exchange Commission (SEC), all SEC regulations that apply to selling stocks must still be followed.