Key Takeaways

  • Offering private company stock allows business owners to raise capital while retaining control.
  • Private stock offerings are typically exempt from SEC registration but must still comply with securities regulations.
  • Key preparation steps include business valuation, choosing offering type (e.g., Regulation D), and understanding investor qualifications.
  • Selling private company stock can be challenging due to illiquidity and limited buyer interest.
  • Employee stock options and secondary market transactions are alternative paths for liquidity.
  • Legal guidance is crucial to ensure compliance and structure offerings effectively.

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.

Issuing Private Stock in Your 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.

A private stock offering is also a good alternative for companies that aren't likely candidates for bank loans.

Preparing for a Private Stock Offering

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.

Next, decide on the form of your private stock offering, which may be one of three types:

  • Private placement
  • Limited partnership
  • Small corporate offering registration

Each has unique paperwork.

Private placement is also known as Regulation D and is the most common. Businesses must file under one of the Regulation D rules. For example, you have a limit of raising less than $1 million under Rule 504. There are other rules to follow regarding the number of individual investors you're allowed and how many investors have to be accredited.

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.

Some businesses prefer the small corporate format because it allows an unlimited amount of investors — accredited or not. An advantage of this option is giving companies permission to advertise for investors, which is a useful marketing tool to find buyers.

Understanding Investor Eligibility and SEC Exemptions

Before offering private company stock, it’s critical to understand which investors are eligible and under what exemptions the offering qualifies. The most common route is Regulation D under the Securities Act of 1933. Regulation D offerings may be exempt from SEC registration but must still file Form D and follow specific rules regarding solicitation and investor accreditation.

  • Accredited investors typically include individuals with a net worth over $1 million (excluding primary residence) or an income of $200,000 annually ($300,000 with a spouse) for the past two years.
  • Non-accredited investors may be allowed in limited numbers depending on the offering rule (e.g., Rule 504 or 506(b)).

Failing to comply with these rules could expose the company to regulatory penalties. Consulting with securities counsel can help navigate these requirements and structure a compliant offering.

Selling Private Company Stock

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.

Some private companies have buyback programs, giving investors the opportunity to sell back their shares.

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.

Liquidity Options for Private Company Shareholders

Private company stock is less liquid than public stock, making resale more complex. Shareholders looking to sell must often wait for a liquidity event, such as:

  • Company buybacks under shareholder agreements or internal policies
  • Tender offers during new funding rounds
  • Secondary market platforms that facilitate transactions between private buyers and sellers (e.g., Forge Global or EquityZen)

Additionally, companies may restrict transfers through their bylaws or shareholder agreements. Employees with stock options or restricted stock units (RSUs) may face vesting schedules and limitations on when and how they can sell.

Understanding the restrictions and rights tied to private company stock is essential for making informed decisions, especially when planning for diversification or liquidity.

Employee Stock Options and Equity Compensation

Private companies frequently use stock options to attract and retain talent. These options give employees the right to purchase shares at a fixed price (strike price), often after a vesting period. There are two common types:

  • Incentive Stock Options (ISOs): Offer potential tax advantages but must meet strict IRS requirements.
  • Non-Qualified Stock Options (NSOs): More flexible but taxed as ordinary income upon exercise.

Employees should be aware of potential tax liabilities when exercising options, especially without a clear path to liquidity. Companies can help by providing periodic valuations (409A appraisals) and offering structured liquidity events or secondary sales options.

Providing clear documentation and education around employee stock options can improve retention and foster alignment between employees and the company’s growth objectives.

Frequently Asked Questions

  1. What is private company stock?
    Private company stock represents ownership in a privately held business that is not traded on public stock exchanges.
  2. Can anyone invest in private company stock?
    Not typically. Most offerings are limited to accredited investors, although some exemptions allow limited participation from non-accredited investors.
  3. How do I determine the value of my company before offering shares?
    Obtain an independent business valuation, often through a 409A appraisal or a third-party valuation firm, to establish fair market value for shares.
  4. Can employees sell their stock options in a private company?
    Not easily. They may need to wait for a liquidity event or participate in company-approved secondary sales if allowed.
  5. Do I need SEC approval to offer private company stock?
    Not usually. Most private offerings are exempt from SEC registration but must comply with Regulation D filing and investor qualification rules.

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