Private company liquidity: A guide to secondary transactions
Creating a win-win path to liquidity in the secondary market
The market for private company equity sales, also known as the secondary market, is a way for executives and other employees of private companies to liquidate stock in order to gain access to cash in the near term. Despite being an established market, the information available to buyers and sellers is limited and characterized by a lack of transparency.
Liquidity opportunities require significant due diligence and create considerations applicable to a company’s valuation, accounting, tax, regulatory requirements, legal and human resources. Are you looking to liquidate private company shares?
Take a look at the most important elements to consider on your path to equity.
Considerations
Valuation considerations
- Price per share
- Price related to the last and next round of institutional financing
- The effect of an above-valuation share price on compliance with Section 409A
- Potential impacts to future valuations and fair value estimations
- Impact on exercise price of future stock options
Accounting considerations
- Role of the company in the transaction (purchaser, facilitator, no involvement)
- Whether the sale should be counted as a compensation expense for the company
- Risk of tainting existing share-based payment plans
- Disclosure requirements for a future IPO
Tax considerations
- Implications for employees holding stock
- Implications for sellers holding stock options
- Other reporting and foreign shareholder considerations
Regulatory considerations
- Numerous legal exemptions to the Securities and Exchange Act can be applied
- Whether a tender offer has been triggered under the securities laws
- Legal disclosures on a Form S-1
- Blackout periods for secondary sales
Legal considerations
- Statutory balance sheet tests limiting the amount of capital a company can use to buy its own shares
- Hart-Scott-Rodino antitrust filing
- Right of first refusal and right of co-sale restrictions
HR considerations
- Impact to employee morale
- Maintaining a culture of equality
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