What Is Private Company Stock?

Private company stock includes shares issued by private companies to their employees or investors. In particular, startups generally use equity to compensate employees during the early stages, when cash flow is limited. Public companies also use equity compensation programs. These programs are designed to motivate employees by tying a portion of their pay to the company's earnings. 

Key Takeaways

  • Private company stock is a type of stock offered exclusively by a private company to its employees and investors. 
  • Unlike public stocks, the purchase and sale of private stocks must be approved of by the company that issued them. 
  • Buying private stocks for a company looking to go public can oftentimes be a lucrative investment strategy. 
  • Because private companies are not required to provide inside information to the public, investors are often wary of them.
  • Although private stocks are not registered with the SEC, SEC regulations still apply to their purchase and sale. 

How Private Company Stock Works 

Selling stock in a private company is not as simple as selling stock in a public company. Employees or investors can sell the shares through a broker if they own shares of a public company. To sell private company stock—because it represents a stake in a company that is not listed on any exchange—the shareholder must find a willing buyer. In addition, the company must approve the sale.

A private stock sale must be approved by the company that issued the shares. Some companies may not want their shares spread around. In addition, some employees of startups may feel pressured to hold onto their company stock as proof of loyalty. Producing a good reason for the sale—such as a downpayment on a house—could help persuade the company to approve such a sale. 

As is the case with public stocks, there are both individual brokers and companies that can assist you with investing in private or pre-IPO stocks. 

Special Considerations 

Pre-IPO Private Stock

Shares of a startup company that’s building a business with plans to take it public with an initial public offering (IPO) are often easier to cash out of. There are a number of web-based companies like EquityZen and SharesPost that are designed to connect people with pre-IPO shares to sell and investors eager to buy them. 

Pre-IPO private company stock exchanges are essentially venture capital markets for the masses. An employee who holds stock in a pre-IPO private company can list shares for sale on this market. Some of these secondary market sites offer loans to buy pre-IPO stock. 

Non-Pre-IPO Private Stock

It is trickier to sell stock in a company that is private and has no intention of going public. The lack of information about most private companies dissuades most outside investors, who are reluctant to buy into a company they know nothing about and can't thoroughly research in public documents. In any case, the company may not approve the sale of its stock to outsiders.

The simplest solution for selling private shares is to approach the issuing company and inquire about what other investors did to liquidate their stakes. Some private companies have buyback programs, which allow investors to sell their shares back to the issuing company.

If not, an insider may be able to provide leads about current shareholders or potential investors who have expressed interest in buying the company's shares. The seller would be wise to visit a securities lawyer to make sure the paperwork is done correctly. Although private stocks are not registered with the Securities and Exchange Commission (SEC), all SEC regulations involving selling stocks must still be followed.