All You Need to Know About How to Sell Shares in a Private Company

When you hold shares in a private company, this means that you own part of a business that is not listed on any public stock exchange. On the contrary, the publicly traded shares are typically held by founders, employees, or private investors and cannot be bought or sold freely on open markets.

It’s more complex to sell shares in a private company than to trade public stocks. There are legal, contractual, and regulatory barriers, such as approval, requirements, valuation concerns, or rights of first refusal. All of these barriers make the process less straightforward, taking more time.

So the main question becomes: How can you sell shares in a private company? In this article, you’ll learn what private company shares are, get a step-by-step guide on how to sell them, and understand where these actions take place. Additionally, we’ll explore the pros and cons of selling private shares and explain why seeking professional help is highly recommended during this process.

What Are Private Company Shares?

Private company shares are equity in a company that is not listed on a public stock exchange. Unlike public companies, these shares cannot be bought or sold freely on open markets.

These shares are held by the founders, employees, and early-stage investors who were involved during the company’s growth phase. Some private companies also grant shares to advisors who contribute to the company’s growth.

Private companies’ liquidity is limited because they are not publicly traded. There is no open market to instantly sell your shares, which means that shareholders usually must wait for a liquidity event such as an IPO, acquisition, or secondary sale. With these events, you can convert your shares into cash.

Can You Sell Shares in a Private Company?

The short answer is yes, but you have to be aware that there are important restrictions. If you sell shares in a private company is not as straightforward as selling public stock.

There are many rules designed to control who can own company shares and when they can be sold. Rules include shareholder agreements, right of first refusal, and lock-up periods.

In most cases, company approval is required before a sale can proceed. This means the process often involves negotiation and compliance with internal policies, making selling private company shares more complex than public ones.

Steps on How to Sell Shares in a Private Company:

• Step 1: Review the shareholder agreement and company bylaws. Start by reviewing contractual documents. This allows you to identify restrictions, internal approval procedures, and the valuation method used. Usually, shareholder agreements contain clauses like rights of first refusal, tag-long or drag-along rights, and transfer restrictions.
• Step 2: Get your shares valued
  As a private company, its shares don’t have a public market price. Your shares must go through a valuation process, which can be done internally or through a third-party appraisal using methods such as comparable company analysis or discounted cash flow (DCF).
• Step 3: Notify the company and other shareholders
  You must inform the company and existing shareholders, respecting contractual clauses like the right of first refusal or pre-emption, before transferring shares to an external buyer.
• Step 4: Find potential buyers
  Potential buyers can include other shareholders, employees, private equity firms, or via secondary marketplaces. The choice depends on the rules in the shareholder agreement and the buyer’s willingness.
• Step 5: Complete legal documentation and transfer process
  Prepare and sign necessary documents like share transfer forms, obtain required approvals, and finalize payment. Update the company’s share register or transfer agent records to reflect new ownership.
• Step 6: Handle taxation and reporting. Understand the tax implications of the sale, such as capital gains taxes and how gains are reported.

Where Can You Sell Shares in a Private Company?

1. Direct Sale to Existing Shareholders: You can sell your shares directly to current shareholders who may want to increase their ownership stake. This is often the simplest and fastest method.
2. Private Transactions with Investors: Private investors or venture capital firms sometimes purchase shares from existing shareholders looking for liquidity.
3. Employee Stock Buyback Programs: Some companies offer buyback programs, allowing employees or founders to sell their shares back to the company under specific terms.
4. Secondary Markets: Specialized platforms connect private shareholders with accredited investors looking to buy pre-IPO shares.

Pros and Cons of Selling Private Shares:

Pros:

• Provides liquidity and an opportunity to cash out.
• Helps diversify your investment portfolio.

Cons:

• It can be difficult to find interested buyers.
• Often sold at a lower valuation due to limited liquidity.
• may involve legal restrictions and complex tax implications.

Why You Should Get Professional Help?

Selling shares in a private company can be complex, involving legal, financial, and tax considerations. Consulting with legal and financial advisors ensures that you comply with all shareholder agreements, company bylaws, and regulatory requirements. Professionals can also help you accurately value your shares, negotiate fair terms, and manage the documentation process efficiently. With their guidance, you can maximize your return while avoiding costly mistakes or compliance issues.

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