Are You Eligible to Sell Private Company Stock?

Selling private company shares involves navigating a range of counterparties, market complexities, and trading requirements. This article explores eligibility requirements for selling private company stock, including vesting and company policies, to help potential sellers make informed trading decisions. By leveraging insights from Nasdaq Private Market, shareholders can help to ensure their transactions are smooth and compliant.

Understanding Vesting and Exercising Shares

The first requirement for selling private company shares or options is that they must be vested. Vesting is the length of time where employees earn the right to own their options and shares. Exercising is the process by which employees convert their options into common shares, which comes at a predetermined price called the “strike price”. The strike price is decided by the company. This usually occurs through predetermined employment milestones or by meeting specific performance targets. Vesting schedules are usually agreed upon at the time of an equity grant and can vary widely between companies. Some use time-based vesting, where shares vest incrementally over years, while others use performance-based vesting, tied to specific goals. Only once shares or options are vested do they become the employee’s property, allowing them to be exercised.

Exercising Options

Employees must exercise their stock options by converting them into shares in order to sell on the secondary market. This process involves purchasing the stock at a predetermined price, known as the exercise price. Unlike owning shares, stock options are agreements that give employees the right to buy shares at a set price.

The value of exercising stock options comes from the difference between the exercise price and the sale price (price the buyer pays for the shares versus the price the options holder pays to exercise). For instance, if the exercise price is $10 per share and the market value is $50 per share, the employee stands to gain $40 per share upon selling.

It’s important to note that exercising options involves specific requirements and considerations, including tax implications and adherence to company policies. Employees should consult their equity administration team to understand these requirements and navigate the process effectively.

Company Valuation

In the private market, there is often limited information available about the company’s financial health and future growth trajectory. This scarcity of data can make it challenging to determine the exact value of the company’s shares. As a result, the most recent transacted price per share becomes a core indicator of the company’s valuation. The last transacted price is often used by investors, potential buyers, and the company itself as a benchmark for the company’s valuation.

Understanding Company Restrictions for Eligibility: The Company’s Right of First Refusal

In the private market, companies have the right of first refusal (ROFR) to purchase the shares back from the seller prior to allowing the proposed buyer to purchase the shares. The ROFR is a standard provision that allows every private company to review and then approve, or exercise their right to purchase the shares themselves. In some cases, transactions are rejected based on a variety of factors. Eligibility criteria are different from company to company and are designed to ensure that transactions align with their strategic interests.

Nasdaq Private Market provides guidance to sellers, helping them navigate their company requirements to ensure that all transactions are conducted in a compliant manner under FINRA/SEC guidelines with specific protocols and procedures. Our approach is designed to support individual sellers while ensuring they are aligned with company requirements and objectives.

Types of Restrictions on Selling Private Company Shares

There are various restrictions for potential sellers often implemented to maintain the stability and strategic interests of the company. Nasdaq Private Market has created technology that authorizes transactions only when they align with company policies and objectives. Here are some common types of restrictions:

Price Floors

Some companies establish price floors to prevent the sale of shares below a certain price threshold. This measure is in place to protect the company’s valuation and ensure that share sales do not adversely affect the perceived value of the business.

Restrictions Around Non-Cap Table Buyers

Certain companies impose restrictions that limit share transfers exclusively to existing cap table holders. These companies prefer keeping a small and controlled cap table for several reasons, first to limit cap table holders to sizable, strategic investors. Second, they aim to prevent new buyers who are investors in competitive companies, thereby mitigating conflicts of interest. Third, maintaining a smaller cap table makes the operational aspects of managing equity simpler and more efficient. This means that shareholders looking to sell can only transfer shares to individuals or entities already listed on the company’s cap table. Nasdaq Private Market can assist by providing a platform that connects sellers with interested, approved internal buyers.

Plans for IPO

Many companies impose transfer restrictions as they prepare for an initial public offering (IPO). To ensure the cap table remains stable and unaltered before going public, companies may block any share sales or transfers during this period. Freezing secondary market trading can help maintain a clear and accurate record of ownership, which is important for compliance and investor confidence during the IPO process.

Sales Windows and Blackout Periods

Companies often impose specific sales windows and blackout periods during which employees can or cannot exercise and sell their shares or options. These periods might be aligned with earnings announcements and other significant company events.

Upcoming Tender Offer

A company might block a trade because it could interfere with an upcoming company-sponsored tender offer. Tender offers are a company’s way of either buying back shares or allowing a third-party to buy shares from existing shareholders. It’s crucial for shareholders to check with equity administration teams to see if a tender offer program is upcoming.

Getting Ready to Sell:

When you are ready to sell, Nasdaq Private Market provides the necessary tools and guidance to help you stay compliant with your company’s policies. Nasdaq Private Market is here to support you through every step of the process, helping you achieve your financial goals.