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