Is Trading Employee Equity a Good Idea?
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If you work for a private company, meaning a corporation that isn’t publicly traded on a stock exchange, you may very well own company shares. But what’s the benefit if you can’t trade them on the stock market?
Holding onto company stock may be a good idea if you think your company will perform well over the long term. But if you don’t have too much faith in your company, or you just need the extra cash, you may be able to sell your equity compensation. Private equity also gives investors access to fast-growing companies before they go public.
How to sell your employee equity
If you work for a company that has granted you employee equity, such as incentive stock options or restricted stock units, you may be able to sell those ISOs or RSUs, though it will depend on whether your company allows it.
Companies such as Forge, ClearList and EquityZen Inc., among others, specialize in helping employees sell their equity. 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. These companies usually charge a fee for brokering the sale of your equity, about 5% of your transaction. That fee may be lower the higher the transaction amount.
“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 shares 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 shares are springing up and allowing people who own private company stock to sell it to a particular type of investor called 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.”
Buying private employee equity is a risky venture. These assets are known as unregistered securities because they are not registered with the SEC. Registration gives investors access to information about the company so they can make a sound judgment before investing.
You can still lose your money when investing with a registered security, but it does not hold as much risk as those that are not registered. And while there is more risk involved with unregistered securities, they don’t add additional tax complications for the buyers, Whalen says. For accredited investors, private employee equity 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 into a company’s equity is through a secondary sale, or a secondary offering. This is when privately held shares of a company are sold to the general public after an initial public offering. In these offerings, shares are sold from one investor to another, generally through a stock market.
Trading employee equity: Is it right for you?
Whether you’re looking to buy or sell, trading employee equity can get complex. And while there are companies that can make the process easier, they’ll charge a fee for it. There may also be tax ramifications to selling employee equity, so it may be a good idea to talk with a tax professional before making any big decisions.
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