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Behind the curtain of secondary market transactions: How C-suite executives can create a win-win event to access liquidity

14 July, 2017

David Ethridge
US IPO Services Leader, PwC US

Employees of private companies often are paid relatively heavily in company stock. But that stock has limited use until the company goes public and the shares can be easily sold on an exchange or the company is sold and the employee cashes out. However, there is another path to liquidity to enable executives and other employees of private companies to liquidate stock in order to gain access to cash in the near term – the secondary market.

The secondary market is well-established, however, the information available to buyers and sellers is often limited and answers to the myriad of questions regarding the accounting, tax and legal issues are hard to nail down. In a new paper titled Private Company Liquidity: CEO and CFO Considerations: A Guide to Secondary Transactions, PwC pulls back the curtain to shed light on this lesser known equity market.

Win-win paths to liquidity

Right now, we’re seeing a pent-up demand for liquidity, mostly due to companies staying private longer and because of the rise of unicorns – startup companies valued at over $1 billion. The secondary market is a good option for executives and other employees of private companies to liquidate stock in order to gain access to cash in the near term. And with the right level of preparation, secondary sales can be managed to create win-win events, provide needed liquidity to employees and help prevent surprises for the company in the future.

Doing your homework is a must

Sales of shares in a secondary market introduce unique challenges that are not well understood. Our new paper goes into detail about certain valuation, accounting, tax, regulatory, legal, and human resources related considerations that should be carefully considered by private companies whose shares are sold in the secondary market.

The challenges of navigating these secondary markets include identifying the right partner, understanding the potential risks, and properly handling the transactions from an accounting, tax, and legal perspective on a personal and company level.