Strategies for Selling Private Company Stock: A Guide for Small and Medium Business Owners

You’ve got some private stock you’re looking to sell, and I totally get it—I’ve been there. I’m AJ, and after selling my small business for a substantial amount, I created SBB to help tackle questions like this. Let’s dive in and hopefully get you paid!

Private businesses are companies that don’t offer shares to the public and aren’t listed on the stock exchange. Instead, they issue shares to employees or investors. For example, many startups pay employees with equity when they first launch, especially if cash flow is tight. Because these companies are often smaller, they sell fewer shares, making the stock harder to liquidate.

Private stock works almost the same as public stock. When a company starts, it issues shares to owners, investors, and early employees—just like how public companies sell stock on the open market. When you’re ready to sell your private shares, here’s what you need to know.

Firstly, you usually need the company’s permission to sell your shares. One of the simplest ways is to sell the shares back to the company, although the company must authorize the sale and repurchase. If many shareholders want to sell simultaneously, the company might not accommodate everyone’s requests. Still, this can be one of the best ways to sell your stock.

Another option is selling the shares to another investor in the company. Unlike public stocks where the exchange finds a buyer for you, you’ll need to do the legwork yourself. The company must follow SEC regulations, meaning you might only be able to sell to accredited investors.

Tender offers are another route. This is when someone offers to buy some or all of a shareholder’s stock. Tender offers are typically public, setting a price at a premium to the market rate, thus incentivizing shareholders to sell.

Secondary transactions are also common. Here, you transfer shares from one shareholder to another in a private sale. Shareholders can sell their equity directly to an individual or institution if the company allows it, but these transactions usually require paying capital gains taxes.

There are special considerations when selling private stock, especially pre-IPO shares easier to sell as a company prepares to go public. Businesses often connect sellers and investors interested in buying these shares. Conversely, selling stock from a private firm that isn’t going public is challenging, as private companies typically don’t disclose information to outside investors.

Before you sell, always check the company’s guidelines. Many private companies have specific rules, like holding shares for a certain period before selling. Also, consider the tax implications, as selling shares within a year means ordinary income tax, while holding for over a year might qualify you for lower long-term capital gains tax.

Understanding the bid/ask spread is crucial. It’s the difference between what a buyer will pay and what you want. If you need quick cash for an emergency, you might have to sell at a lower price, but waiting might get you a better deal.

When selling, thoroughly understand the process. Depending on your role, the business might be willing to buy back shares. Selling private stock can be challenging—you need to find a buyer and accurately value the stock. Unlike public companies, private firms don’t always provide financial information, making valuation tricky. But investing in startups can pay off in the long run. Stay patient, and learn as much as you can about the company when you own shares.

What questions do you still have about selling private stock? Let us know!