by Christie Olsen and Michael Penfield
Aug 17, 2021
Say you’ve been working at your start-up for a couple years and want to generate some cash by selling a portion of your vested stock. That should be easy, right? According to research from Stanford University, 56% of employees are not permitted by private-company employers to sell their stock. But what are the options for the other 44% who can sell? This depends on a few key factors. First, is there demand by outside investors for the stock or a mechanism in place to facilitate the transaction? Second, how do you find a platform to sell your shares on?
What’s involved in exercising your equity rights?
The first step to sell your vested private equity is to find out if there are potential buyers.
Sometimes the buyer may be the company itself. There are also exchanges that connect sellers with buyers. Both institutions and individuals participate in these exchanges. Some companies have adopted platforms like Securitize Markets to facilitate employee sales, while others have less structured processes. If there is a market for your company’s equity, the next step is to determine the process.
Companies may have the right to approve or reject a prospective buyer of employee shares, so a notice and review period of several weeks might be required before a transaction can occur. Companies also may have the right to purchase shares at the price you negotiate with a third party. This Right of First Refusal process can add 30 to 60 days to your transaction.
Other considerations before selling
Before selling, you will need to provide the buyer with evidence that you have the right to sell. Your company’s General Counsel or CFO can provide you with information about the documents required to sell. Your company may also have an approved purchase agreement that will further simplify the process.
When should you exercise your equity rights?
There are a plethora of reasons why employees wish to exercise their rights to sell vested stock. Perhaps you're leaving your current position and no longer desire to hold your stock. Additionally, if you take a job with a competitor, a conflict of interest may arise where your current or future employer may require you to exit your holdings.
Another reason for liquidity is to diversify your portfolio. Excess concentration of risk applies to private equity as well as other investments. It may make sense to reduce your exposure to a single company and replace it with a diversified portfolio.
It may also make sense to sell during to help afford a significant milestone in your life, such as marriage, having children, or purchasing a home.
Selling your shares
As discussed in our Shifts in Value Creation topic, start-up companies are staying private longer, so understanding your options is now more important than ever. IPOs, tender offers, or other liquidity events are never guaranteed. So it is essential to manage your equity early on to reduce the overall risk profile of your financial position.
The secondary market for employee-owned shares is large and growing. In 2017 volume was estimated at $4 billion. This rise of a seasoned market offers alternatives for employees and investors to sell vested private company equity. Several exchanges have emerged to match the buyer and the seller and provide guidance on the transaction process
Perhaps the most exciting development is the use of blockchain technology to accelerate the process of selling private company equity and open the market to more investors. Securitize is leading this movement to reduce transaction times and documentation processing requirements for sellers and buyers.
When selling your equity, as with selling any security, it may result in a taxable event. It’s important to carefully research tax consequences or to consult a tax professional prior to making any sale. Interested in learning more about the blockchain, check out our Not-So-Beginners Guide to Blockchain article.
Contributing writers: Christie Olsen and Michael Penfield
