Is Trading Private Company Stock a Good Idea?
Buying or selling employee equity has become easier and more accessible, but is it right for your portfolio?
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If you work for a private company, meaning a company that isn’t publicly traded on a stock exchange, you may own private company stock as part your employee compensation package. Private company stock gives employees access to fast-growing companies before they go public. That may be good if you think the company will perform well over the long term. But if you don’t have much faith in your company, or you need extra cash, you might want to sell your equity compensation.
How to sell your private company stock
If your employer has given you equity such as incentive stock options or restricted stock units as part of your compensation package, you may be able to sell those ISOs or RSUs if your company allows it.
Companies such as Forge, ClearList and EquityZen Inc., among others, specialize in helping employees sell their private company stock. These companies allow you to list your shares and what you’d like to sell them for, and then they work to find a buyer for you. The fee is usually about 5% of your transaction (the percentage may decrease if the transaction amount increases).
Pros and cons of selling private company stock
“The main benefit of selling private company stock on a marketplace would be to gain liquidity. Private company stock is notoriously illiquid and there are many reasons why an investor would want some liquidity,” said Aaron Hatch, a certified financial planner and co-founder of Woven Capital in Santa Clara, California, in an email interview.
“One reason an investor might want liquidity is that he or she has an overconcentration of their net worth in the private company stock and would like to diversify their investments. Another reason an investor might want liquidity is to achieve a life goal for which they need cash, such as buying a home, sending kids to college, or early retirement.”
Your ability to sell your private company stock may depend on your company’s specific policies or blackout dates. Selling employee equity may also create some tax complications, so if you have shares you’re looking to sell, it may be helpful to speak with a financial advisor or tax professional first.
How to buy employee equity
Companies that specialize in trading private company stock match sellers with accredited investors. The Securities and Exchange Commission defines accredited investors as those with either earned income over $200,000 (or $300,000 with a spouse) in each of the previous two years or someone with a net worth over $1 million (excluding the value of a primary residence).
“Often, people in a company have units that have vested already, but there might not be an IPO for a long time. So an accredited investor can come in and say, ‘OK, we’ll buy your units from you and we’ll wait for the IPO, and we’ll give you something in between,’” says Chris Whalen, a certified public accountant in Red Bank, New Jersey. “So let’s say they’re sitting at $10 a share and the company expects to IPO at $100. An accredited investor might come in and offer to pay $40 a share.”
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Pros and cons of buying private company stock
Buying private employee equity is a risky venture. These assets are not registered with the SEC, so investors may have less access to information about the company in order to make a sound decision before investing.
Despite the added risk involved with unregistered securities, they don’t add tax complications for buyers, Whalen says. For accredited investors, private company stock just becomes another stock investment, he says.
“For someone looking to buy private company stock, it is important to be very clear about why you're adding a specific holding to your portfolio and to be honest with yourself about the downside risks,” Hatch said. “Unlike publicly traded companies, private companies often have less public information about the company so it is very important to do your due diligence before investing and to understand the rights and limits of being a shareholder.”
Another way to buy private company stock is through a secondary sale or secondary offering. Secondary offerings occur when privately held company stock is sold to the general public after an initial public offering. In these offerings, investors sell shares to each other, generally through the stock market.
Trading employee equity: Is it right for you?
Whether you’re looking to buy or sell, trading private company stock can be complex. There are companies that can make the process easier for a fee. There may also be tax ramifications to selling employee equity, so be sure to talk with a tax professional before deciding.
