editione2.1.1Updated September 12, 2022
Ultimately, the value of your equity depends on whether and when you are able to convert it into stock that you sell for cash. With public companies, the answer is relatively easy to estimate—as long as there are no restrictions on your ability to sell, you know the current market value of the stock you own or might own. What about private companies?
A liquidity event is usually what makes it possible for shareholders in a private company to sell their stock. However, individuals may sometimes be able to gain liquidity while a company is still private.
Definition A secondary market (or secondary sale, or private sale) transaction is when private company stock is sold to another private party. This is in contrast to primary market transactions, where companies sell directly to investors. Secondary sales are not routine, but they can sometimes occur, such as when an employee sells to an accredited investor who wants to invest in the company.
caution Private sales generally require the agreement and cooperation of the company, for both contractual and practical reasons. While those who hold private stock may hope or expect they need only find a willing buyer, in practice secondary sales only work out in a few situations.
Unlike a transaction on a public exchange, the buyer and seller of private company stock are not in total control of the sale. There are a few reasons why companies may not support secondary sales:
Historically, startups have seen little purpose in letting current employees sell their stock, since they prefer employees hold their stock and work to make it more valuable by improving the value of the company as a whole.
Even if employee retention is not a concern, there are reasons private sales may not be in the company’s interest. Former employees and other shareholders often have difficulty initiating secondary transactions with a company.* Private buyers may ask for the company’s internal financials in order to estimate the current and future value of its stock; the company may not wish to share this confidential information.
Companies must consider whether sales could influence their 409A valuation.
Secondary sales are an administrative and legal burden that may not make it to the top of the list of priorities for busy startup CEOs and CFOs.
important However, participation in the secondary market has evolved in recent years,*** and a few options may be possible:
Forge and EquityZen have sought to establish a market around secondary sales, particularly for well-known pre-IPO companies.
A few other secondary firms have emerged that have interest in certain purchases, especially for larger secondary sales from founders, early employees, or executives. A company can work with a firm to facilitate multiple transactions. These firms include 137 Ventures, ESO Fund, Akkadian Ventures, Industry Ventures, Atlas Peak, and Founders Circle.
In some cases, an employee may have luck selling stock privately to an individual, like a board member or former executive, who wishes to increase their ownership. Further discussion can be found on Quora.
The key decisions around stock options are when to exercise and, if you can, when to sell. Here we lay out some common scenarios that might apply to you. Considering these scenarios and their outcomes can help you evaluate your position and decide what you should do.
Exercise and hold. You can write the company a check and pay any taxes on the spread. You are then a stockholder, with a stock certificate that may have value in the future. As discussed, you may exercise:
Early, even immediately upon grant.
Before vesting (if early exercise is available to you).
Sometime after vesting.
After leaving the company, as long as the exercise window is open.
Wait until acquisition. If the company is acquired for a large multiple of the exercise price, you may then use your options to buy valuable stock. However, as discussed, your shares could be worth next to nothing unless the sale price exceeds the liquidation overhang.