Okay, so you have some understanding of the private markets, equity crowdfunding, how to evaluate them, and you’ve invested in the online offering of a private company. Congratulations, you’re an investor in a nascent and exciting market! You should also have some idea of the type of returns you’ll see and when you can expect them. Owning equity in private companies is slightly different from public equities. As you probably know, private companies can generally only sell their shares to a select group, but the JOBS Act has allowed private companies raising online to sell their private shares to the public. If you want to exit your position in any private investment, however, there aren’t many options available. In this article, I’ll go over the ways you can divest yourself of private equity.
How Can I Sell Private Shares That I Own?
With publicly traded companies, the companies can buy and sell their shares to the general public. Privately owned companies, however, can only be sold to a select group of willing investors, i.e. venture capitalists and others. With the enactment of the JOBS Act, privately owned companies can solicit investment from the general public. When you invest in and own shares in a private company, there are only a few ways you can “sell” or exit your position: via some type of liquidity event, i.e. a merger, acquisition, bankruptcy, or going public, and lastly, secondary markets.
The first few options are rather self-explanatory and have been expanded upon in other pieces we’ve written, but secondary markets are one of the few ways early investors in startups can sell their private shares before standard exit opportunities. Secondary market transactions are essentially when shares in one private company are sold to another private party. Selling your shares in a private company can be fairly difficult. If you work at a startup, own equity in that startup, and want to sell your equity, for example, your shares are typically subject to a right of first refusal (ROFR) in favor of the company, meaning the employee can’t sell their shares to a third party without offering to sell their shares to the company first.
Additionally, private sales generally require the agreement and cooperation of the company, for both contractual and practical reasons. That means even if you own the equity and have a willing buyer, a third party, generally the startup/company, must first sign off on the sale. There are a number of reasons that we won’t go into why a startup may not support secondary sales, but it’s a transaction that only works out in a few situations.
In recent years, however, the secondary market has seen increased activity, especially as startup remain private longer and early investors and employees want to cash in their early positions. Companies like SharesPost, Forge, and EquityZen have established a market around secondary market transactions, especially for well-known pre-IPO companies. Venture firms have also been players in the secondary market with MicroVentures, 137 Ventures, and Industry Ventures being well-known for their interest and work in the secondary market. In most cases, it’s incredibly difficult to exit your position in the private markets.
How Does This Relate to Equity Crowdfunding?
Much like traditional venture, investors in online offerings will have difficulty exiting their positions once invested. Given equity crowdfundings still nascent status and secondary market transactions being relatively difficult to execute as well as being unreported, a full-on secondary market for equity crowdfunded companies is years away from developing. In more developed equity crowdfunded markets like the UK, however, a secondary market has appeared with Seedrs being on the forefront of it all. So there is hope! Either way, we at KingsCrowd want to help investors in the online private offerings market so that investors can make the best possible decisions. If you’re interested, make sure to subscribe to KingsCrowd and explore some of our Top Deals!
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About: Francis Vu
An investment professional with a background in private equity and venture capital having spent time conducting investments at VU Venture Partners and Pacific Oak LLC with a finance and management degree from Tulane University.