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 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 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:

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.

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.

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