Selling Shares of a Corporation: Everything You Need to Know
Selling shares of a corporation can be done to either raise necessary funding or to sell off the company.3 min read
Updated November 18, 2020:
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
- Other businesses
- 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.
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.
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.