The complete guide to selling pre-IPO company equity
10 min
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
Pre-IPO, or private, equity is typically seen as illiquid because it can’t be sold or traded on public markets. However, there are certain situations where pre-IPO equity can be sold or liquidated. The most common way is to sell them to buyers on secondary markets, although tender offers or liquidity financing can also be viable options.
Selling pre-IPO company equity can be a great way to diversify your portfolio or get the cash you need for important financial needs but it’s also often a complex and misunderstood financial transaction. So, how do you approach selling private company stock? This guide will provide the practical steps for navigating selling pre-IPO equity and the processes involved.
Selling pre-IPO equity is like selling any public stock or investment: It can have a significant impact on your financial situation. And like any major financial decision, it should be driven by a clear understanding of your financial goals. There are a variety of reasons someone would want to sell equity before an IPO, including:
Whatever your reason may be, selling pre-IPO equity can be a very valid way to achieve your financial goals.
Before you decide to go ahead and sell your private company equity, it’s crucial to understand how the process works. Often, this begins with understanding your company’s policies around selling your pre-IPO equity. When a company is publicly traded, employees with company stock are free to sell and trade as they like. But when the company is still private, it’s often at the discretion of the company whether you are allowed to sell and, if you are, the terms of any sale.
You’ll want to review your equity agreements to understand if there may be any restrictions to selling. Some companies may allow you to sell, others may completely restrict your ability to sell. Other times, a company may allow a sale but it will be subject to approval by the company and its board of directors. There may be other factors involved too, like you may be allowed to sell a certain percentage of your equity or you can only sell above a certain price.
You should also look at your vesting schedule as you’re often only able to sell any stock options that you’ve vested. Your vested options may not need to be exercised — you may be able to perform a cashless sale — but you may also want to consider the cost and tax implications of exercising prior to a sale vs. doing a cashless. For example, there could be risks with exercising prior to a sale if you are unable to find a buyer or complete a sale. That means you will still have to cover the cost, and potentially taxes, associated with exercising. On the other hand, exercising prior to a sale could present potential tax benefits. It’s important to deeply understand these trade offs.
You should also consider all the risks associated with selling pre-IPO equity. First, it is a sale so you will lose ownership of any shares that you do sell. If the valuation of your equity increases, or your company IPOs or gets acquired, you lose the opportunity to participate in the upside. Of course, if you only sell a portion of your equity, you would still be able to participate in an exit event. That said, if your company fails to IPO or exit or the valuation goes down, a secondary sale could prove very beneficial.
The most common way to sell your company equity before it’s publicly traded is on the secondary market. The “secondary market” is not a single market but is made up of various different platforms, often called exchanges, where buyers and sellers can transact. Some of these exchanges are available to retail sellers while others may not be available to the general public. Oftentimes, these exchanges or platforms are only available to certain brokers, bankers, or other professionals.
Many secondary markets also impose a minimum sale amount. Buyers may also have their own minimum. For example, a minimum transaction amount of $100,000 may be required to complete a sale on a certain exchange.
The typical steps in selling on a secondary market or to a secondary buyer include:
It’s also important to understand that there is no standard timing for a sale. Finding a buyer could happen quickly, or it could take months, if it happens at all. It is not guaranteed. Similarly, navigating any legal requirements or other processes with your company could take time even if you do find a buyer.
All of this should factor into your decision when selling pre-IPO equity.
Finding a buyer isn’t guaranteed, so getting to that point is a huge step. But many sellers typically have a price in mind that they want to sell for. It’s likely the buyer also has a set price-per-share. Many buyers are also institutional buyers, meaning they are professionals and do this for a living. They have done their research and know companies inside out. This can, unfortunately, give employees an unfair advantage as many buyers may know more about your company than you do. This is why it can be valuable to work with a partner or a broker that also has this knowledge to help when it comes to negotiating a price. But price is only one part of the negotiating process.
When the sale closes can matter. Consider market conditions, the company’s financial performance, and your own financial needs. For example, if you know that the company may be closing a funding round soon or increasing their 409A valuation, this could impact the sale price.
Buyers may have their own restrictions about the sale. For example, they may not buy if your company is in a blackout period or other conditions. Be aware of these before you enter a contract.
You may be able to negotiate the structure of the payment, such as a lump sum payment vs. installment payments. Be clear on what type of payment structure you want, what the buyer wants, and what the contract ultimately stipulates.
Make sure that the sale complies with any applicable laws and regulations. You may want to consult a legal advisor to ensure it does.
Finding a buyer for your pre-IPO equity often isn’t the end of the road. You’ll likely have to navigate some legal, compliance, and/or regulatory requirements. These can either be through your company, securities laws, and more. You want to ensure that you are complying with all state and federal regulations, as well as any stipulated by your company in your equity grant agreement.
What you should pay attention to, include:
Selling pre-IPO company equity is a multifaceted process that requires careful consideration and preparation. It's essential to understand your motivations, navigate the legal and regulatory landscape, value your equity accurately, and negotiate the sale terms effectively. We believe engaging with experienced legal and financial professionals is crucial to ensuring a successful transaction that aligns with your financial goals.
While the decision to sell your pre-IPO equity should be made with care, it can provide liquidity, diversification, and risk mitigation, allowing you to make the most of your investment in a private company. By following this comprehensive guide, you'll be better equipped to navigate the complexities of selling pre-IPO equity and make informed decisions to secure your financial future.
Secfi can help you sell your pre-IPO equity by connecting you with buyers in our partner network as well as helping you throughout the entire process, including negotiating a price and navigating any policies or restrictions your company may have.