Effective Strategies for Selling Your Shares: Understanding Public vs. Private Market Secondaries

There are material differences between private and public secondary shares, including investment objectives, costs and expenses, liquidity, safety, and fluctuation of principal or return.

For early employees of private technology companies, selling shares can be a complex process. Unlike public companies, where stocks trade openly on exchanges, private company shares lack widespread liquidity. This means selling requires strategic planning, legal understanding, and often company approval.

Knowing the key differences between selling shares in public and private markets is crucial. Here is what selling shareholders need to know to make strategic decisions.

How to Sell Private Company Shares

In the past, selling shares in a private company was often limited to certain times, like during a tender offer. However, in the past decade secondary market transactions have grown in prevalence. These transactions facilitate liquidity outside company-wide liquidity events.¹

Both tenders and secondary sales can help bridge the gap between the selling needs of early shareholders and the challenges of trading private company shares. Here is what you need to know.

Selling Private Shares via a Secondary Market Transaction

Secondary market transactions provide a structured way for employees and investors to sell their shares. Unlike tender offers, which offer liquidity at a predetermined price and timeline decided by the company, secondary transactions allow shareholders to sell shares with more flexibility on price and timeline. However, these transactions must adhere to company policies and legal agreements. For shareholders interested in exploring a secondary market transaction, there are a few key steps.

Steps in a Secondary Sale:

1. Review Shareholder Agreements – Understand any restrictions, rights of first refusal (ROFR), or other requirements outlined in your Option Agreement or other shareholder documents. ROFR means that the company has the right to buy back the shares instead of allowing a new investor to buy shares. In most cases stock options need to be exercised before you can sell. 
2. Find a Buyer – Potential buyers can include institutional investors, strategic partners, or individual accredited investors. EquityZen's marketplace connects sellers with a broad network of vetted buyers from over 700,000 market participants.²
3. Negotiate Terms – Determine an appropriate share price and agreement conditions based on the market value of your shares. 
4. Secure Company Approval – Most secondary transactions require company approval, often involving a 30-day right of first refusal (“ROFR”) period.³
5. Finalize the Sale – Upon approval from the company, sign the share transfer agreement (STA) to complete your sale. If selling through EquityZen, we will wire you your selling proceeds and provide tax documents upon completion. 

Selling Private Shares via a Tender Offer

For employees with stock options, company-led tender offers provide an opportunity to sell shares at a predetermined price. This process often occurs when the company seeks to provide liquidity to employees or when an investor wants to increase their stake.

Steps in a Tender Offer

1. Tender Offer Announcement – The company or an external investor announces an offer with specified pricing and terms.
2. Determine Eligibility – Not all employees qualify, so it’s essential to review your Option Agreement and other documentation. 
3. Evaluate the Offer – Consider the tender offer price, company growth potential, tax implications, and personal liquidity needs.
4. Submit Shares for Sale – Employees looking to sell must register their shares with the company or via the platform that is organizing the tender.
5. Company Review and Allocation – If seller interest outweighs buyer interest, liquidity may be allocated on a pro-rata basis.
6. Sale Completion and Payout – The sale is finalized and funds are distributed.
7. Tax Considerations – Selling may trigger capital gains taxes, so consulting a tax professional is advisable

Selling Public Company Shares

Once a private company goes public, selling shares becomes more straightforward. Banks and brokerage firms help shareholders sell publicly traded shares. Here is a step-by-step approach:

1. Open a Brokerage Account: If you haven't already, open a brokerage account with a reputable firm. This account will serve as your trading platform. Selecting the right brokerage can impact the fees you pay and the range of services available to you.
2. Place a Sell Order: Decide which type of sell order you want to place. Options include market orders, limit orders, and stop orders, each with its own advantages depending on market conditions. Understanding the differences between these orders can help you manage risks and optimize the sale price.
3. Monitor the Market: Keep an eye on market trends and news that could impact the market price of your shares. Staying informed about economic indicators and industry news can provide insights into the best timing for your sale.
4. Execute the Sale: Once your order conditions are met, the brokerage will execute the sale. Sale proceeds will be deposited into your account.

Key Considerations for Selling Public Shares:

• Market Timing – While timing the market can be challenging, understanding market trends and economic indicators can help you make informed decisions about when to sell. Key indicators include interest rates, economic growth forecasts, and initial public offering (IPO) activity, all which impact stock prices.
• Tax Implications – Selling shares can have tax implications, including capital gains taxes. Understanding the differences between short-term and long-term capital gains taxes is crucial. They can significantly impact the net proceeds from your sale.⁴

Furthermore, it’s important to understand the tax consequences of your sale.  Consider strategies to mitigate tax liability, such as tax-loss harvesting or utilizing tax-advantaged accounts. Consulting with a tax advisor can provide insights into how to minimize tax liabilities and maximize after-tax returns.

• Diversification – Selling shares can provide an opportunity to diversify your investment portfolio. For many employee shareholders of private company stock, their equity may represent a sizable portion of their net worth. Reinvesting proceeds into a mix of asset classes can reduce risk and enhance long-term returns.⁵

Shareholders should consider their risk tolerance and investment goals when deciding how to diversify. Most investment strategies involve spreading investments across different sectors, geographical regions, and asset types, to help protect against market volatility.

Global IPO Landscape and Its Influence

Understanding the global IPO landscape is crucial for making informed decisions about selling shares. Market conditions, regulatory changes, and investor sentiment can influence the value and liquidity of shares, both private and public. Staying informed about these trends can help investors anticipate changes in share value and liquidity.

Conclusion

Selling shares both in the private or public markets requires a strategic approach. Within the private markets, understanding shareholder agreements and the options for pre-IPO liquidity are key to making informed decisions. Platforms like EquityZen streamline the process, connecting sellers with accredited investors while ensuring compliance with company policies. 

Whether selling in the public or private market, employees should consider timing, tax consequences, and diversification to maximize financial outcomes. By understanding the market, shareholders can make the right decisions to meet their unique needs.

This article should not be construed as personal investment advice. For informational purposes only.

Footnotes:

1.  Closing is not guaranteed.

2.  Closing is not guaranteed.

3. ROFR periods may vary by issuer

4. This information should not be construed as professional tax advice; consult with a qualified tax professional for guidance specific to your individual situation.

5. Diversification does not assure a profit or protect against market loss.