Key Takeaways

  • Selling company shares can raise capital, transfer ownership, or reduce founder risk.
  • There are different methods for selling shares, including private placement, employee equity, or a public offering.
  • Legal compliance is critical and includes understanding SEC regulations, drafting shareholder agreements, and following state laws.
  • The sale of shares impacts corporate control, taxes, and future business flexibility.
  • Strategic planning around timing, valuation, and buyer profiles maximizes benefits and minimizes risks.
  • You can find an experienced securities attorney through UpCounsel to guide you through the process.

Selling shares of a corporation can be done to either raise necessary funding or to sell off the company. Some of the most common entities a company will sell shares of stock to are:

  • Venture capitalists
  • Investors
  • Other businesses
  • Individuals
  • Angel investors

There are a number of reasons why investors will buy shares of company stock, including:

  • To receive dividends
  • To sell the shares later at a higher rate

For some small businesses, selling to the general public is not always an option. Selling stock to private investors can help them get the cash they need while still retaining control over who is allowed to become a company shareholder.

Before company stock can be sold, the board of directors will need to approve the sale and the shareholders being sold to. They will also be responsible for setting the price of the stock and drafting the stock sales agreement. Before you can begin to sell shares of stock, the company needs to show some profitability and growth. Tools that will show this to your investor include:

  • Your business plan
  • Any financial projections
  • Marketing plans

Investors will want to know where their money will be spent and how they may be able to make money from investing. When you issue private stock, the offering will not necessarily need to be registered with the SEC. There are many ways a small business can begin the process of selling shares of stock without having to go through the long process of becoming registered with the SEC. Even though the stock is not regulated, it will still need to be in compliance with both federal and state laws.

It is important to realize that even though selling shares of stock can provide you with much-needed capital, you are giving up some control in the decision-making of the company. Shareholders will have a say in electing the corporation's directors. Shareholders also retain the rights to review all corporate records and books, as well as have a number of votes in key decisions that affect the corporation.

There is an added benefit to giving up some control of the company through stock, which is obtaining the knowledge and skills various stockholders bring to the company. Additionally, when selling private shares of stock, you will have the benefit of knowing most of the shareholders.

You will always want to maintain a good relationship with all your shareholders so they will be willing to purchase more shares if offered and assist you when you need it. It is vital to keep them well informed of all business operations, dealings, and prospects.

In the event you need to raise funds through the selling of securities, you will be required to produce a private placement memorandum, which is used to disclose all information about the company. For small businesses, it is recommended that you draw up this document with an experienced securities attorney.

Reasons Your Company May Sell Stock

There are many reasons why a company may want to sell shares of stock. Some of the most common reasons include:

  • To generate cash
  • To pay down debts
  • To utilize for other investments
  • To use for charitable giving
  • To fund an expansion
  • To sell the company

Selling a portion of a company can also reduce the risk the owner has, as it allows them to diversify their own personal assets. A company may also decide to sell shares over a period of time in preparation for transferring ownership to new owners, which will minimize the initial tax shock after succession.

Methods of Selling Company Shares

There are multiple ways to approach selling company shares, each suited to different business goals and structures:

  • Private Placement: Shares are sold directly to select investors such as venture capitalists, angel investors, or private equity firms. This method avoids the cost and complexity of a public offering but requires legal disclosures and compliance with Regulation D exemptions under SEC rules.
  • Employee Stock Options or ESOPs: Selling shares to employees is a common method to raise capital while aligning employee incentives with company performance. This can also serve as part of a succession or exit strategy.
  • Initial Public Offering (IPO): Larger companies may choose to sell shares publicly through an IPO. This process involves substantial regulatory oversight, SEC registration, and ongoing compliance with public company reporting standards.
  • Secondary Sale: Existing shareholders sell their shares to third parties. This doesn’t raise new capital for the company but can provide liquidity for early investors or founders.
  • Direct Public Offering (DPO): A lesser-used method where the company sells shares directly to the public without an underwriter, often online. It's more accessible but lacks the backing and exposure of a traditional IPO.

Each method carries different regulatory, tax, and strategic implications that should be carefully evaluated with legal counsel.

Complete vs. Partial Sale

There are two different ways a company can sell shares of stock. They can do it through either a complete or a partial sale.

  • A complete sale will end all your involvement with the company unless you are provided with an employment or consulting contract.
  • A partial sale can be done to raise capital, start a transition, or provide incentives to employees. In a partial sale, you will want to make sure you retain enough stock to be the majority shareholder.

Strategic Planning Before Selling Company Shares

Before initiating a sale, consider these planning steps to ensure a smooth transaction:

  1. Define Objectives: Are you raising capital, planning an exit, or incentivizing employees?
  2. Know Your Buyer: Tailor your approach depending on whether you're targeting strategic buyers, financial investors, or individuals.
  3. Maintain Control: In a partial sale, retain voting shares or structure governance agreements to preserve decision-making authority.
  4. Tax Planning: Capital gains taxes and other tax consequences should be evaluated early. The structure of the deal can affect whether gains are taxed at ordinary or favorable capital gains rates.
  5. Engage Experts: A valuation professional, securities attorney, and accountant are often necessary to guide a compliant and profitable sale.

Legal and Compliance Requirements

Selling company shares involves significant legal oversight to avoid regulatory issues:

  • Securities Law Compliance: Even private sales must comply with federal and state securities laws. This typically means filing exemptions (e.g., Regulation D, Rule 506) with the SEC and potentially state filings under blue sky laws.
  • Shareholder Agreements: Clearly outline shareholder rights, restrictions on share transfers, buy-sell provisions, and dispute resolution terms in a shareholder agreement.
  • Corporate Governance: Board approval is typically required before issuing or transferring shares. Update corporate bylaws and cap tables accordingly.
  • Disclosure Requirements: For private placements, use a Private Placement Memorandum (PPM) to disclose company risks, structure, and financials to protect the company from liability and comply with disclosure rules.

Working with a corporate attorney ensures your share sale structure aligns with legal requirements and protects all parties involved.

Valuation and Timing Considerations

Determining the right time and price to sell company shares is crucial for success:

  • Business Valuation: Before selling shares, it's important to obtain a professional valuation of your business. This can be done through methods such as discounted cash flow (DCF), comparable company analysis, or asset-based valuations.
  • Timing the Sale: Ideally, sell during a period of strong performance, growth potential, or market interest. Economic conditions and industry trends also affect investor appetite and valuation.
  • Clean Financials: Ensure your books are up to date. Potential investors will review your financial statements, tax filings, and future projections.

Having a clear, supportable valuation will help in negotiations and attract serious buyers.

Frequently Asked Questions

1. What are the main ways to sell company shares? You can sell shares through private placements, IPOs, employee stock plans, or direct sales to investors. The method depends on your goals, business size, and investor type.

2. Do I need to register with the SEC to sell company shares? Not always. Private sales often qualify for exemptions under SEC Regulation D, but you must still follow certain filing and disclosure requirements.

3. How is the value of company shares determined? Share value is typically calculated using financial metrics like cash flow, earnings, assets, and market comparisons. A professional valuation is recommended.

4. Can I sell my company shares to employees? Yes, through stock option plans or employee stock ownership plans (ESOPs). This can motivate employees and serve as a succession plan.

5. What legal documents are needed when selling shares? Key documents may include a stock purchase agreement, shareholder agreement, private placement memorandum, and board resolution authorizing the sale.

If you need help with selling shares of a corporation, 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.