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Asher Cooper
Asher Cooper

How To Buy Shares In A Private Company



Historically, a private company stockholder would have to wait until the company goes public or gets acquired to get a return on investment of sweat equity or of early capital. But as the path from ideation to public listing has been extended this century, so has the pressure to obtain or enable a liquidity transaction.




how to buy shares in a private company



Stockholders in many private companies are increasingly participating in liquidity rounds,\" also known as secondary sales, where they sell shares of stock for cash before the company goes public. There are many factors that a holder or a private company should consider when deciding if and how to structure this type of transaction. Will a liquidity transaction help a company retain key talent, or is it enabling its own demise by helping its key talent achieve an early exit? Is it fair to those that are participating and those that are not given access? There are also specific steps a company can take to control secondary transactions in its stock in the future.


As with any transaction involving stock, the parties may have liability for disclosing relevant material and nonpublic information to the other parties (or for failing to make the disclosures!). This is critically important when the sellers do not have board-level details about the company. Whether the company has liability exposure will depend on its involvement and the relevance of any undisclosed information. Making disclosures to potential buyers can trigger leaks to competitors, customers, suppliers, or other ecosystem players that could be dangerous to the issuer of the stock.


A private company tends to feel pressure to provide liquidity to its stockholders as its value increases. So, whether you decide to engage in a liquidity transaction or permit your stockholders to sell while the company is private, setting your stockholder expectations both early and clearly can go far. Getting the details right will save you legal, accounting, HR, and tax headaches that are imminently avoidable.


Stockholders in many private companies are increasingly participating in liquidity rounds," also known as secondary sales, where they sell shares of stock for cash before the company goes public. There are many factors that a holder or a private company should consider when deciding if and how to structure this type of transaction. Will a liquidity transaction help a company retain key talent, or is it enabling its own demise by helping its key talent achieve an early exit? Is it fair to those that are participating and those that are not given access? There are also specific steps a company can take to control secondary transactions in its stock in the future.


Offering shares in a private company is one way to raise capital to grow the business. There are some differences between selling shares in a private company versus a public one. When you sell shares in a private business, you give up some ownership in the company.


One of the most time-tested ways to raise capital for a business is to issue private company stock. Private stock offerings are a type of equity financing. It gives investors who purchase the private shares an ownership stake in the company.


In exchange for obtaining money to grow your business, you give up sole ownership. Later, you may decide to pay the investors back and take back equity, or you may keep them on as part-owners until you sell your company.


A lot of business owners like private stock placements because they give the owners more control versus an initial public offering (IPO). A private offering typically limits the number of shareholders. In an IPO, however, the number of investors could be in the hundreds or thousands.


There's also the matter of adherence to the Securities and Exchange Commission (SEC) rules and extensive public disclosure filings with public stock offerings. Most private stock offerings don't have to be registered with the SEC. It's generally quick and affordable to prepare them.


The first thing you should do in getting ready for a private stock offering is to obtain an independent business valuation. With this valuation, you'll see what your company's market value is. Then, you'll be able to determine the private share value.


Normally, a business owner may sell just part of the company's value in a private stock offering. The owner retains a majority stake in the company, so he or she can continue to make day-to-day business decisions without outside influence.


A limited partnership offering is only for companies that are organized as this business structure. Therefore, C and S chapter companies can't use this method. Real estate developers who want to raise money for construction are one of the more common organizers of limited partnerships seeking private stock offerings.


Sometimes, public and private businesses use a compensation program to issue shares to their employees as a motivation tool. Eventually, some people may want to sell their shares. In the case of publicly traded shares, it's a simple process. The employee can sell shares through a broker.


It's not as easy to sell private shares, however, as these shares represent a stake in the company. Because the company isn't listed on an exchange, it can be hard to find a buyer. Investors are sometimes dissuaded about private companies because they don't have a lot of information on them. Naturally, they're often reluctant to buy into a company they know very little about.


Once investors find someone interested in buying their stocks, they should consult with a securities lawyer to complete the paperwork. Even though private stocks aren't registered with the SEC, it's still required to follow the agency's regulations regarding selling stock. Not complying with these regulations may lead to administrative, civil, or criminal penalties.


If you need help with offering shares in a private company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.


For many of the individuals involved, a sale or acquisition is likely to be a one-off or rare event. A glossary of common terms used in the context of private company sales and acquisitions can be found in the PDF version of this guide.


Buyers and sellers should ensure they are aware of the pensions implications when buying or selling a target company or business. This is a complex area and the potential liabilities and obligations, particularly in the context of final salary schemes, can be significant.


Warranties are assurances about the target company or business. To protect the buyer against liabilities which may exist in the company or business, the sellers will typically be required to give a large number of warranties covering all aspects of the company or business being acquired. If any of these assurances are untrue and as a result the value of the company/business is less than the buyer paid for it, the sellers may be liable to pay damages to the buyer under a breach of warranty claim.


Warranties also perform the dual function of encouraging the sellers to provide further information about the company or business in the form of disclosures, over and above the information extracted during the due diligence process.


Certain types of sellers who have a more detached role in a company may refuse to give the usual broad range of warranties, for example, venture capitalists, receivers or trustees. In these situations a buyer will want to be even more confident in the quality of its due diligence.


Confidentiality agreement. The buyer will be under a duty not to disclose any confidential information it receives concerning the target company or business during the negotiation process. This duty may be reciprocal if information is also flowing from the buyer to the sellers or to ensure that the parties keep the proposed transaction itself confidential. Sometimes these confidentiality obligations will be combined with the exclusivity agreement or found in the heads of terms.


By comparison with the sale of a residential property where the process (and the cost) is likely to be reasonably predictable, a company or business sale has a great many variables. The nature of the company or business being sold, as well as the complexity of the deal structure, may affect the level of legal fees. Examples of issues which are likely to increase the complexity of the paperwork, the extent of negotiations, and thus have a consequential knock-on effect on the level of fees include: 041b061a72


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