Equity 101

Key takeaways

  • Some secondary markets allow employees to sell private company shares before an IPO or exit.

  • Employees will need company approval to make a sale on a secondary market. 

  • Most secondary market platforms require you to sell at least $100,000 worth of equity.


Liquidity before an IPO

Life often happens out of sync with equity. You may be sitting on loads of stock options or private company shares — which have real value — but you need to convert that value into cash before an IPO. Cash so you can do other things in life … like investing in a down payment, starting a family, or just diversifying your holdings.

If you want or need a chunk of cash, and don’t want to wait years for a future initial public offering (IPO) or another exit (or maybe you don’t think your company value will increase), you might consider selling your shares on a secondary market. 

👉 Selling on a secondary market can help you get cash for your shares before the company has an official liquidity event.

What is a secondary market?

A secondary market, also referred to as a secondary stock market, allows investors to trade private company shares before an IPO or exit occurs. There are a number of companies today now specializing in this. They act as marketplaces — matchmaking between individual sellers and investor buyers.

The shareholder — that’s you — can sell shares on a secondary market for a fee and typically there is a minimum value that must be met, which means you need to sell a significant amount. Unlike public markets, private secondary markets don’t have obvious price-per-share and the price could range from the fair market value (FMV) of common stock to something above that if shares for your company are in demand. 

In contrast, a public market has public share prices and sales take place through a public market in a very transparent transaction. The prices of shares in a public market are fixed, but in secondary markets, these prices can ebb and flow with supply and demand. 

When can you sell on a secondary market? 

Once your stock options have vested, you’ll first need to exercise them. (That’s what we do! We can help you cover the cost with option funding.) 

👉 Option funding can help you cover the cost of exercising after you have vested.

After you have exercised your stock options and own your shares, you can hold them until your company has an exit (like an IPO or acquisition) or, if you’re willing to trade off future potential upside, you can sell them on a secondary market. 

However, even if you’re wanting to do so, selling on a secondary market is not always a sure bet. When the markets are strained (hello mid-2022!) finding an available buyer may be more difficult. Once you do have a buyer, you will also need to do some paperwork with the issuing company, such as getting board approval on the right of first refusal (ROFR). This process could take days or weeks. 

Lastly, don’t forget about taxes. Our old friends, capital gain taxes, will be waiting for you. To qualify for long-term capital gains (which you usually want to do and will typically save you money), you’ll need to wait a year between exercising and selling (and in the case of ISOs, make sure it’s been two years since your option grant).

👉 To qualify for long-term capital gains, you will need to wait a year after exercising stock options to sell those shares.

Pros and cons of secondary markets

Of course, there are both advantages and disadvantages associated with secondary markets. Let’s take a look at both sides.

Pros 

  • You can sell your shares before the company goes public.

  • This type of sale allows you to get cash for your shares in the near term.

  • You can diversify your risk and reinvest the sale proceeds into a different asset.

  • There is no lock-up period.

Cons

  • You lose the future upside on any shares you sell (e.g. if you sell for $10/share today and they list at $25/share in the future).

  • Many platforms require you to sell at least $100,000 worth of equity.

  • Secondary markets charge a commission fee.

  • The sales process can take a long amount of time and you’ll have to work with your company.

  • There is potential that a company could block the transaction.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for investment, tax, legal, accounting, or other professional advice. Vested does not provide investment, tax, legal, accounting, or other professional advice. You should consult your own investment, tax, legal, accounting, or other professional advisors before engaging in any transaction or equity decision.


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