Key Takeaways

  • Public stock trades are transparent and highly liquid, while selling private stock involves restricted markets and complex approval processes.
  • Private stockholders may face valuation challenges, transfer restrictions, and the need for company or board approval before completing a sale.
  • Secondary marketplaces, tender offers, and direct private sales are common ways to sell private stock.
  • SEC regulations typically limit sales to accredited investors, and failure to comply can create legal risks.
  • Understanding liquidity events, lock-up periods, right of first refusal (ROFR), and tax consequences is essential before you sell private stock.
  • Planning ahead with professional guidance helps maximize value and reduce risks in private transactions.

Wondering how to trade private stock? Unlike public stocks, private stocks are traded in private, unpublished transactions. Trading private stocks is different than trading public stocks and different rules apply to each.

Trading Public Stock

Public stocks are those traded on public exchanges, such as the London and New York stock markets. You can check any online finance portal, such as Google Finance or Yahoo finance and see the price at which a public company's shares were exchanged. The whole world can see this information, free of charge.

You can even view the corporation's income statement, balance sheet, and price history, which often dates back several decades. With this information, it's much easier to make an informed decision and compare the stock to other investment options.

Making an offer to purchase the stocks must be done through a registered broker. If your offer is rejected, you'll be able to know why you were unable to complete the purchase and what price another person paid to obtain the same shares. These days, any individual with an online trading account can easily buy and sell publicly traded stocks with the click of a button.

Various platforms exist that can help private stock sellers and buyers connect. The Carta (formerly eShares) platform maintains information about private stocks, including the names of owners and what they own, transaction logs, and a list of sellers and interested buyers. This type of platform can reassure both parties they are conducting a fair exchange.

Unfortunately, there are a few major disadvantages associated with owning private stock, such as:

  • Difficulty assessing the value of private companies. Accurately gauging a private company's value can be extremely challenging, as financial disclosure is not required at the same level as public companies.
  • Third-party estimates can vary significantly. Comparing the private company to a similar public company is often the best bet for determining the company's value.
  • Selling stocks back to the company is typically the easiest way to sell shares, but it involves authorization from the company and negotiation of a fair price.
  • Not only are private stocks difficult to determine their value, but they can also be difficult to sell at a reasonable price.

Key Differences Between Public and Private Stock Sales

While public stock trades happen instantly on regulated exchanges, selling private stock requires navigating restrictions. Private companies often restrict who can buy shares, how transactions are structured, and when sales can occur. Unlike public investors, private shareholders may need approval from the company or board and must comply with securities laws that limit sales primarily to accredited investors.

Trading Private Stock

Any company that does not have publicly listed shares is considered to be privately held. Most privately held companies are smaller than public ones, and it's extremely rare for a privately held company to grow to the size of a company like Exxon or Walmart and not go public. Therefore, private companies tend to have fewer stocks than public companies, and, in general, you won't be able to see how frequently or at what prices shares were exchanged.

To buy private stock, you'll need to identify and contact shareholders, and then make an offer for their stock. It's possible that you won't even be able to make a satisfying offer. For example, the company's founders and family members might refuse to sell their shares. In addition, once you do acquire a private stock, you might have a difficult time finding buyers and end up stuck with it for a long time.

Challenges in Valuing Private Stock

Because private companies do not publish regular financial statements, valuation is difficult. Investors and sellers often rely on:

  • Third-party appraisals or 409A valuations.
  • Comparisons to similar public companies.
  • Recent funding round valuations.

Without clear benchmarks, the risk of undervaluing or overvaluing shares is high. Sellers should account for illiquidity discounts—private stock usually trades at a lower value than public equivalents.

Ways to Sell Private Stock

Private shareholders have several options when looking to liquidate:

  • Company Buyback: The business itself may repurchase shares directly, often at a negotiated price.
  • Secondary Marketplaces: Platforms such as Nasdaq Private Market and CartaX connect buyers and sellers of pre-IPO stock. These platforms require compliance checks and company approval.
  • Tender Offers: During liquidity events, a company or third-party investor may offer to purchase shares from existing shareholders.
  • Private Transactions: Direct sales to accredited investors are sometimes allowed but usually require legal documentation and company consent.

Each method varies in complexity, timing, and pricing. Understanding the best fit depends on your liquidity needs, company policies, and market demand.

Private Stock Exchange Rules and Regulations

Rules and regulations about purchasing and selling stocks are established in the company's constitution and in the federal Companies Act of 1993. The Act allows existing shareholders to maintain preemptive rights over the company's issuance of new shares. This means that any new shares are first offered to existing shareholders (through proportional amounts), in order to maintain the existing shareholder's current distribution and voting rights. The offer to purchase new stock must remain open for a reasonable amount of time. However, companies are free to limit, modify, or negate these statutory preemptive rights as they see fit, so long as the policies are included within the company's constitution.

Private investors may sell their stock to other investors. However, they may typically only sell to what the SEC has determined as “accredited investors,” which are people with a net worth of over $1 million or yearly income of at least $200,000.

Those who sell private stock must carefully adhere to all the complex SEC regulations and complete all necessary paperwork in order to protect themselves from legal risk.

Tax Considerations When You Sell Private Stock

Selling private stock can trigger significant tax obligations. Key issues include:

  • Capital Gains Tax: Profits from the sale may be taxed at short-term or long-term capital gains rates.
  • Alternative Minimum Tax (AMT): Holders of incentive stock options (ISOs) may be subject to AMT upon exercise and sale.
  • Qualified Small Business Stock (QSBS): If the shares qualify under IRS Section 1202, investors may exclude up to 100% of capital gains from federal taxes.

Because tax outcomes depend on individual circumstances, consulting with a tax professional before selling is strongly recommended.

Common Restrictions on Private Stock Sales

Private stock transfers are often subject to contractual and regulatory limits, including:

  • Right of First Refusal (ROFR): Existing investors or the company may have the right to purchase shares before outside buyers.
  • Lock-Up Periods: Employees and early investors may be restricted from selling until after an IPO or designated liquidity event.
  • Accredited Investor Rules: Federal law generally restricts sales to individuals with $1M+ net worth or $200k+ annual income.
  • Board or Company Approval: Most transfers require official approval to finalize.

Frequently Asked Questions

  1. Can anyone sell private stock?
    No. Selling is usually restricted to accredited investors and requires company approval.
  2. What is the easiest way to sell private stock?
    Company buybacks or tender offers are generally the most straightforward, though they may not always be available.
  3. How do I know what my private stock is worth?
    Valuation typically comes from recent funding rounds, third-party appraisals, or comparison to public companies.
  4. What are the risks of selling private stock?
    Risks include illiquidity, lower-than-expected valuations, and tax consequences if not carefully planned.
  5. Do I need a lawyer to sell private stock?
    While not always required, legal guidance can help ensure compliance with securities laws and protect you from liability.

If you need help understanding how to trade private stock, 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.