February 9, 2024
You’ve heard the startup employee dream a million times by now: join a startup, get equity, help the company grow, then make a life-changing amount of money when the company either gets acquired or has an IPO. And then enjoy your newfound freedom, make a few angel investments, go on vacation, open a local coffee shop… The sky’s the limit.
There is just one problem with that fantasy. It is a long time before most startups make it to IPO or acquisition, if they make it there at all. And while that is sometimes because the company does not succeed, it also happens when the company doesn’t want to just yet—take a company like Stripe, for example, which has been surrounded by IPO rumors for years. It’s not so difficult to wind up at a valuable company that does not have any meaningful near-term plans for an exit.
And just because your startup can wait years for an exit doesn’t mean you can (or want to).
Maybe you want to build your dream home. Create some financial security for your family. Hedge your bets in case you don’t feel good about the company’s direction. Get enough liquidity that you can take a few years off. There are a thousand-and-one good reasons you might want to sell before an IPO.
So, if you want liquidity soon and your startup:
1) Is valuable enough that your equity is worth something
2) Does not have plans to exit (IPO or acquisition) in the near future
What do you do?
Welcome to the private market. Selling your private shares of a non-public startup is the tempting alternative to waiting for the mythical IPO. But, if you have ever looked into this, you know it’s a nightmare: a tangled web of confusing options and dangerous financial games. Questions quickly arise, like “Can I even afford the tax burden to exercise and sell?” and “Am I getting the best price for my equity?”. As an employee, it feels like you have less optionality than everyone else.
The complexity of private markets is especially unfortunate because you only get one shot at this. Once you sell your equity, or some portion of it, it’s gone. You can’t just buy back in.
If you want to get liquidity from your equity before your company exits, you’ll want to do this right. The rest of this short handbook will help you do just that—we’ll guide you through the various options available and give you the high-level information you need to know on each.
Note: None of the information below is professional advice. We are not financial advisors. That being said, navigating the private secondary market is complex. Our goal here is simply to make it feel a lot less complex.
Most startups do a bad job at explaining what your equity actually means, what kinds of shares you have, and what your options would be for selling them. And even if they did explain it to you way back when, with your offer letter, you should revisit all of these details before you make the decision to sell.
One assumption many people make is that if you have equity in a private startup, you can—by default—sell your shares however you want. This is not true. To know whether you can actually sell your shares, try to answer the following questions.
Do you have shares or options? Many startups, especially earlier-stage startups, will likely have granted you options instead of shares. An option is the right to purchase a share of your startup’s stock at a fixed strike price (which is the price you will need to pay in order to ‘exercise’, or purchase, the stock). If you have 40,000 options at a $1 strike price, that means you have the option to purchase 40,000 options for $40,000.
If you have options, you’ll need to exercise them (read: purchase the shares!) before you can start exploring the private markets to sell your shares. Exercising can be tricky for a number of reasons, like your current cash balance and potential tax implications, but that is a separate can of worms and we’ll cover it elsewhere. If you need help paying to exercise your options, you may want to explore what’s called non-recourse financing (a topic for another day).
What kinds of shares do you have? Later-stage startups and larger companies will often grant RSUs to their employees, which represent the right to receive shares of the company for free. But RSUs, like options, usually have a ‘vesting date’. If your RSUs have not vested yet, you do not yet own the shares and cannot yet sell them on the private market.
You should investigate whether you have double-trigger or single-trigger RSUs. The latter only vest after the company IPOs, which means you will not (for the most part) be able to participate in the private stock market. If you have single-trigger RSUs and they have vested, then you may be able to sell stock on the private market.
Now, assuming you do own actual stock in the company, you’ll need to ask the following.
What is your company’s stance? Your company will have rules about how, and if, you can sell your shares. This may be expressed in the terms of your option agreement, option plan, company bylaws, shareholder agreement, or other relevant documents. Most companies’ documents permit you to sell stock as long as you have the approval of the company that issued that stock.
Some companies also have a clause called the right of first refusal (ROFR). This means that, if you find a buyer on the private market, your startup and/or some of its investors, have the right to substitute themselves for the original buyer and purchase your shares themselves for the same price. If they decide not to purchase your shares, they must let the deal go through. Your startup might have even stricter rules, though, like a complete prohibition on sales without board consent or a full lock-up period that prevents sales for a definite amount of time.
The bottom line is that it depends. Some companies are more receptive to secondary sales than others. If you happen to be a shareholder of a company that is more restrictive, you’ll have fewer liquidity options— frustrating, we know. The good news is, the temperature on selling private stock in startups is slowly changing, and some companies are changing their policies to be more employee-friendly to compete for top talent.
You’ve likely heard the phrase “Time in the market beats timing the market,” which usually refers to a philosophy used for investing in public stocks and index funds. This makes sense for public investing, because the market does tend to go up over time, and if you invest in, say, a fund that tracks the S&P 500, this may be a good philosophy.
Selling your startup equity is different. There is no guarantee that your individual company will continue to increase in value over time, and the market forces that determine its value might be out of its control. And, once you sell, you don’t get that equity back—you’ve made your decision.
We can’t tell you when to sell, but we can tell you a few factors to consider:
What are the conditions in the broader private market? If we’re in a difficult market, your startup may be valued lower than it would be otherwise.
How do you, and others, feel about the company’s future? You will (of course) be biased, but you should decide what you think about the company’s short- and long-term future.
What is your intention and urgency for selling? If you want to get equity ASAP for a specific reason, you may consider ignoring everything else and proceeding.
As with selling any equity in anything, though, it is truly impossible to predict when your startup will ‘peak’. And it is also true that some liquidity (in most cases) is better than no liquidity at all.
Knowing how much your shares are worth is one of the most confusing parts of this whole process. That’s because unlike a public company, where the value of a share is objective and clear, the value of private shares can fluctuate wildly.
It’s a cliché, but your equity is truly only worth as much as another party is willing to pay for it. It does not matter if your startup’s last 409A valuation was $1B if the amount private parties are willing to purchase your shares for values the company at closer to $600M, or $2B. That being said, there are a few ways you can estimate the value of your shares.
Real-time trading data. This is far and away the best way to know how much your shares might be worth, because it is quite literally based on what people are paying for shares of your startup. The best place to get this data is a secondary marketplace, like Hiive. Note that price will also depend on the kind of shares you have. If you are (or were) an employee, you likely have Common Stock. This is normal. If you have Preferred Stock, though, your equity may fetch a higher price—Preferred Stock includes voting rights and improved liquidity preferences, which most buyers like.
Look at public comparisons to your startup. If you have shares of Stripe, look at public fintech payments companies (PayPal, Block, Toast). See what multiple of their revenue they are trading for, then apply this to your own situation.
Look at your company’s latest 409A valuation. A 409A valuation is a third-party evaluation of the fair market value of your company’s stock. Your company likely does one at least once per year. The main problem here is that 409A valuations are not based on actual purchase data, which means they are not gospel.
The valuation of your company’s last capital raise. If your company just raised a Series E at a valuation of $4B, you may be able to use $4B as a benchmark for your share value calculations. This is less reliable the further you get from the fundraise.
Fund markups: Funds that own startup shares will periodically estimate how much their portfolio companies are worth. This information is reported in public filings. This can be another benchmark for your startup’s valuation, but remember that because funds charge based on assets under management (AUM), there is an incentive to avoid devaluing (marking down) startup valuations.
We wrote a guide on this here if you are interested in further details.
Tax calculations are the point at which the exciting, adrenaline-fueled exercise of dreaming up how much money you’ll make becomes a nightmarish fever dream of confusingly written blog posts and bad advice. We can’t explain every detail here—and you are best off working with an expert when you do sell—but we can help you do the napkin math for a rough estimate.
There are two primary situations you’ll get yourself into. Either:
You are selling private shares you already own, on a marketplace like Hiive, OR
You are exercising and selling shares at the same time, perhaps in a tender offer.
If you are selling shares you already own: Your estimated tax burden, then, depends on how you got the shares you currently have. Let’s break down the four common situations.
You were granted ISO stock options: You likely did not pay tax when you exercised the stock options unless you triggered something called AMT. If you have held your shares post-exercise for at least a year, then you will be subject to long-term capital gains tax when you sell.
You were granted NSO stock options: You have already paid ordinary income tax on the difference between the amount you paid to exercise the shares and the amount those shares are worth based on your company’s most recent 409A. When you sell your shares, if you’ve held them for at least a year, you will pay long-term capital gains tax.
You had RSUs that vested: You paid ordinary income tax on the stock when it vested, and assuming you hold them for at least a year, then you will pay normal capital gains tax on the profit from the sale.
Note: If you are exercising and selling shares at the same time: Then you will most likely pay ordinary income tax on your gains—you will not have held your shares long enough to qualify for capital gains tax.
Consider the above carefully, speak with a tax expert, and decide when (and how) it might make most sense for you to sell your shares.
The primary risk of selling soon, rather than waiting for an IPO or exit, is that your company will eventually be worth more than it is today—that by selling now, you have picked the wrong time from an opportunity cost standpoint (you have not maximized your return). If your company prefers that you do not sell your shares, this is what they will tell you.
That is only one side of the story, though. By not selling now, you also take the risk that your company will never reach an IPO or exit, that it will decrease in value, or that it does reach IPO but at a lower valuation (meaning your shares could be worth less than they are today). Instacart is a good example: the company had a higher valuation in the secondary market prior to their IPO than the current trading price of the stock. More information in our piece on Instacart’s IPO here.
The other risks are mostly tax-related and personal, or related to selling your shares on the private market. For example, some private market risks include:
Using a broker or marketplace that takes an unreasonably large piece of your sale price.
Selling to a private party for a lower price than other private parties would have paid.
Working with a broker or marketplace that makes the process stressful and difficult.
Some issuers (in this case, the company you have equity in) want to prevent private secondary transfers, so they charge egregious transfer fees. These fees make a transfer practically untenable for small shareholders—and painful even for major shareholders.
The private market risks are mostly (or entirely) avoidable, and we’ll cover how to navigate private markets in the next section.
If you have made it this far, take a deep breath. A sigh of relief is well deserved at this point, assuming you can sell and feel good about how much you could make. Now, we’ll do a quick dive into the different options you have for selling your shares (and the pros and cons of each).
Your company, or a third-party investor, may make an offer to buy shares from you and other employees, in cash, for a certain price. This is a tender offer. It’s different from selling your shares directly to buyers in a number of ways:
Tender offers are company-led (your company is the one negotiating price and signing the term sheet with the buyer(s), not you).
Tender offers are one-time offers at a fixed point in time.
Your company sets rules about who can sell into the tender.
You may be limited on how much you can sell.
Imagine you’re a carpenter who has been apprenticing in a workshop for a year. Last month, you made a beautiful table. If the workshop you’re apprenticing for offered to buy the table from you (or offered to mediate for another buyer), that would be like a tender offer. If you took the table and went out to find and negotiate directly with buyers on your own, that would be like a one-off private secondary sale. It’s an oversimplification, but that is the fundamental difference.
As for whether participation in a tender offer is a good idea, first consider the ideas you’ve already read in this handbook. Is it a good time to sell? Then, look at the other liquidity options we’re about to cover and ask: Is this the best way to sell?
There are a number of traditional brokers who will offer to sell your shares for you and take a percentage cut of the money you make. Well-connected individual brokers (or firms) can do this effectively—they will often have a network of interested buyers ready. The downside you get here is that there’s less transparency and optionality with a traditional broker vs. a marketplace (which we’re about to cover).
With a traditional broker, you have less transparency into what your shares are selling for on the private market and whether you are getting a good deal. Commissions can be high, too.
If you want to sell your shares on the private market and a tender offer is either unavailable or unappealing to you, we believe that private secondary marketplaces are by far the best way to sell. Private secondary marketplaces (though highly regulated and controlled) are similar to all the other marketplaces you use on a regular basis.
There are buyers and sellers on the platforms. Sellers can list their shares and buyers can make offers. You can see historical transaction data and current bids, which gives you visibility into what the actual value of your shares might be.
If you are interested in exploring a private marketplace, we run one. It is called Hiive. We would love to talk to you about what selling on Hiive might look like—and see if it is a fit for your goals.
Once you have decided where you’d like to sell, it’s time to go through with the actual process. Here are some details on how it works.
Matching with a buyer differs based on how you plan to sell your shares. If you are working with a traditional broker, they will act as the intermediary between you and the buyer. If you are selling on a private marketplace like Hiive, you will often get to talk directly with the buyer and negotiate with them.
Regardless, once you have matched with a buyer and landed on a price that works, you need to go through with the transaction—which means getting approval from the issuer.
Earlier in this handbook, we touched on the fact that your company has rules about if, and how, you are able to sell your shares. In many cases, getting approval from your company means going through the right of first refusal (ROFR) process. This is usually how it works:
You find a buyer with bona fide interest in purchasing your shares
You communicate the terms of the proposed transaction to the company
Your company decides to either exercise their ROFR and match the offer, purchasing your shares directly, or allow the private party to purchase your shares
When people use private marketplaces to find buyers but the company ends up exercising their ROFR, the question often arises: “Why do I still need to give a percentage of the sale to the marketplace if my company is just purchasing the shares directly?”
In this case, it’s useful to remember that the only reason your company is willing to purchase the shares directly is because you have actually found a bona fide buyer—your company can now either let someone they don’t know join their cap table, or they can purchase your shares at the price you found via the broker or marketplace.
The process of getting the deal done can feel complex, but it tends to be straightforward (and can be easier if you’re working with a broker or a marketplace). Before anything actually happens, though, you will have to sign the share transfer agreement—which will include all the relevant details, like share number and purchase price.
Our advice? Never sign something you do not understand. Take as much time as you need to make sure you completely understand the agreement you are entering into and each of its intricacies. Ask an expert for help. You do not want to end up in a situation where you end up losing out (in some way) because a document was confusing.
The rest of the process is straightforward. The transaction closes either with the parties transferring funds and shares directly to each other, or via the broker acting as a paying and/or escrow agent.
Have more questions about the process? Check out our FAQ guide here.
Figure out if you have a good reason to sell. Impatience can create a massive opportunity cost (selling at the wrong time could mean you lose out on thousands or millions). Ask yourself why you want to sell now, what your other options are, and whether you are OK with the potential opportunity cost of selling now vs. waiting for an IPO.
Learn about the shares you have. Do you have options? Private stock? RSUs that will vest soon? This will help you figure out your path forward (if you are able to sell).
Know how much your shares might be worth (and how much you stand to make). Your shares are only worth what someone will pay for them, but that doesn’t mean you can’t do some napkin math to have a rough estimate of how much you might make.
Understand the tax implications of a sale. Look carefully at the potential tax burden you’ll face when you sell your shares. Do some analysis, speak with an expert, and determine if there’s a good reason you should wait to sell. For example, if you’d been holding shares for 10 months, you’d likely want to wait for the 1 year mark before selling so that you could pay capital gains tax instead of ordinary income tax.
Find the right buyer. There are a number of ways to do this, but we find that people often see the best outcomes with private marketplaces. Hiive is one of those marketplaces.
Finalize the transaction. Get the paperwork and compliance and order, then sign the documents. Remember—never sign something you do not understand.
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