How To Cash Out Of A Non-Public Stock

Anyone with an online trading account can buy and sell shares of most publicly-traded companies with the click of a button. However, shareholders of private companies, selling stock can be much more challenging.

Private Stock Compensation

Most of the time, the average retail investor doesn’t invest in private companies. However, retail investors can end up with large holdings of private stocks if they work at a company that includes stock as part of a compensation program. These programs allow employees to feel as if their personal financial interest is intertwined with their company’s performance and give employees the chance to “invest in what they know.”

Unfortunately, there are many downsides to owning stock in a private company. First, it can be extremely difficult to accurately gauge the value of private companies, which aren't held to the same financial disclosure standards as public companies listed on major exchanges. Private shareholders must often rely on comparisons to similar public companies and third-party estimates that may vary substantially from firm to firm.

The Roach Motel

In addition to the difficulty in accurately valuing a private stock, it can be extremely difficult to get rid of it at a decent price.

“Private investments—that’s a roach motel. Dollars go in, and they never come out,” Kevin Landis, manager of the Firsthand Technology Value Fund, said back in 2014.

The easiest way for a private stockholder to sell shares is to sell it back to the company. However, this process involves company authorization and negotiating a fair price.

Private investors can also sell their shares to other investors. Unfortunately, private investors are typically only able to sell to what the SEC classifies as accredited investors, which are individuals with a net worth of more than $1 million or annual income of at least $200,000.

Related Link: What Does It Mean To Be An 'Accredited Investor'?

Even still, sellers must be careful to comply with all the complicated SEC regulations and paperwork that go along with selling private stock or they could expose themselves to legal risk.

An Alternative Approach

Perhaps the best approach to selling private stock is to contact a company that specializes in private stock sales. eShares is one startup working to make trading private stocks as easy as public ones.

The eShares platform keeps a dashboard of information about private stocks, including which investors own what, a log of transactions and prices and a list of potential buyers and sellers. These types of platforms can help connect private stock buyers and sellers and reassure them that they are getting a good price for their transaction.

Takeaway

There’s no question that buying and selling private stock is a complicated and dangerous endeavor. Even when public stocks start to fall, investors typically know that they can find a buyer out there somewhere and cut their losses.

In the private market, there’s no guarantee that there will be any investors out there willing to buy shares of a struggling company at any price. Even when times are good, finding a buyer and agreeing on a price can be a difficult and expensive process.