How can I sell my shares in a privately-owned company I used to be employed by?

Question

Basically, I was a software developer at a company and I was issued some stock options early on, before the company grew significantly. The company then hired a CEO who pledged to take the company public, eventually. This never happened and eventually I left the company to work for other companies. Before leaving though, I paid money to exercise my stocks and I now have a stock certificate for a (probably very small) portion of a quite successful private company.

I have spoken with some other former employees and some of them have had trouble selling any of their shares (after leaving the company) because the company is private and they left on not-so-amicable terms with the company. I personally left the company on good terms but most of the people who knew me well are now gone from the company. The terms of the issuance of the shares require the company to approve any sale of the shares to another entity. My questions are threefold:

1. Are private companies in Delaware, USA required to facilitate the sale of the shares of the company or could my shares be just as valuable as toilet paper, if the company never goes public? (Assuming that the company doesn't want me to be able to get rid of my shares).
2. My colleagues who previously tried to sell their shares wanted to know how many shares were issued and what the most recent valuation of the company was at that time. Apparently the company refused to give them this information without making them sign an NDA. Is this legal? How could someone be expected to go about finding a broker to sell their shares if they have signed something saying they will not disclose the information that would allow a buyer to know the approximate worth of the shares?
3. Should I approach the company in some particular way, asking if they could facilitate the sale of my shares to other shareholders? If I do this tactfully, perhaps I can be in their "good graces" and therefore be more likely to be able to sell my shares, than my colleagues who have failed to do so before me. Any tips? Since my rough approximate value of my shares is not very large (probably less than $20k), I don't think it is worth hiring a lawyer because the company ultimately has better lawyers than I could afford and I don't want to put money down to hire a lawyer and then have a high change of having nothing to show for it in the end.

Answer 1

1. No, private companies have no obligation to help you sell their shares.
2. It may not be legal, but there is very little you can do short of suing the company. Great article about this from the Wall Street Journal here.
3. You could approach the company and ask if they are interested in buying back shares, or if they know anybody who is interested in buying. But those are probably a long shot. There are sites that allow you to sell private shares, such as https://sharespost.com/marketplace/selling-shareholders/. This might be your best bet, but I wouldn't be surprised if you have to sell at a significant discount, if you can sell at all. You also have to watch out for any terms you may have agreed to that would disallow this.

Answer 2

The company going public is probably your best chance of being able to sell your shares. Therefore, your first job should probably be to try and see if there are any indicators that this might still happen: scour their website and financial news websites for anything that might indicate that this is still a possibility. If you do still have contacts within the company, you might consider speaking to them, although they may not be allowed to say anything, even if they know¹. The rest of this answer assumes there are no such indicators.

Other answers cover that the company has no obligation to help you sell your shares, and that the shares are "effectively worthless" unless you can sell them. Given the nature of a private company, especially one which seems reticent about revealing the number and "value" of its shares, it is likely that the only people who might potentially buy your shares are the existing (private) shareholders or the company itself. Therefore:

Should I approach the company [...]. If I do this tactfully, perhaps I can be in their "good graces"

is probably your best approach (but bear in mind there is no guarantee that you will achieve a favourable outcome). In the interest of pragmatism, you might also have to accept the need to sign an NDA.

You essentially have two problems: (1) getting "the company" (starting with the person you write to) to be "on your side" by agreeing to put you in touch with potential buyers, and (2) persuading a buyer (possibly the company itself) to buy your shares.

The first of these, at least, is more an interpersonal problem than a financial one. However galling it might be, your starting position is, essentially:

• Unless you can find someone to buy your shares, they are effectively worthless. Anything you can get should probably be regarded as a bonus.

• The company has virtually nothing to lose if you cannot sell your shares. Taking an antagonistic approach is likely to be counterproductive (they'll just ignore you, or fob you off).

You don't want to lie in any opening letter, but it may help if you put applicable facts in a "good light". Some points you might make:

• You were involved in the company from its early days, and were – at least to some degree – instrumental in their early success. Perhaps mention key products/areas that you worked on.

• Try to "anchor" yourself to anyone still at the company you knew, or to selected ex-colleagues that the current management might still recognise/know. "Selected" should probably avoid anyone who left under "not-so-amicable terms".

• Although you are no longer with the company, you left on amicable terms. As testament to this, and emphasising your belief in the potential for the company, you chose to exercise your share options before leaving.

• It may be best to avoid mention of earlier plans for the company to go public. Doing so could make it sound like you only exercised your options to "make a killing". It also highlights the fact that those plans never came to fruition and, by implication, current/recent management "failed" to carry out those plans. Whether either inference is "true" to any degree does not really matter: mentioning the plans could be counterproductive.

• Ask first whether the company is operating a buy-back scheme. If not, are they able to put you in touch with any existing shareholders who may be interested in increasing their holding (the emphasis should be on finding someone who wants to buy the shares; not on the fact that you want to sell).

Realistically, your chances of selling – either at all, or at least for a "reasonable" price – may be slim unless there's at least an outside chance of the company going public. If the company doesn't already have a buy-back scheme in place, there's no real upside for them to do so now. Similarly, few existing shareholders are likely to want to buy your shares if there's no chance of a public offering and them making a future profit. (A conceivable – though unlikely – exception might be if there's "in-fighting" in the boardroom, and your allotment is just enough to bump one shareholder/faction ahead of another!)

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¹ Regarding insider trading. I am not a lawyer, but both What Is Insider Trading and Is It Illegal? on Investopedia ("Insider information is knowledge of material related to a publicly-traded company"), and Insider trading on Wikipedia ("Insider trading is the trading of a public company's stock") seem to indicate that it does not apply to private companies. However, you should take appropriate advice before talking to anyone within the company (or, at least, acting on anything they might tell you).

Answer 3

In general, shares in a private company aren't worth anything. (Unless the company is paying dividends or they give voting privileges or something.) There's no good way to convert them into cash unless the company is buying.

Answer 4

You can reach out to the company and see if they are interested in buying you out. Depending on local laws (IANAL), to do that, they might have to issue a buyback. Smaller, privately held, companies probably won't do that as they lack the necessary cash.

Your next option is to do your own research. Start with the state of Delaware's division of corporations: https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx

Every company is required to file (depending on state) a list of officers and shareholders. That info should be publicly available. Reach out to those people and see if they are interested in buying your shares.

Another option is to find out when the next shareholder meeting is being held and let the company know you plan to attend. This way you can meet the other shareholders, and ask questions regarding the company's financial situation. That will help you get a better feel of what your shares are worth, as well as find a larger market for them.

Finally, ask the company for a shareholder list and financial statements. I don't know what the filing requirements are, but they should be providing atleast some of that information to shareholders annually. Signing an NDA prevents you from sharing the information but you can still hire an attorney or a broker to help you sell the shares so I don't see that as big deal. Your prospective buyer will already have this information, and if he or she doesn't ... well, that's to your advantage.

Answer 5

Who are the investors in this company? Are they angel investors, VCs, investment banks, etc? If they put money in the company before they might be interested in buying what you have as well. As I understand it, there shouldn't be any legal barriers to your selling your shares (stock options might be more difficult but I'm no VC/investment banker).

You may have to take a haircut on the share price, though, since in a private market you can't just log into a brokerage account and sell to the hordes of market makers and HFTs. You probably want to sell your shares more than prospective buyers may want to buy them, so they do have the advantage there; you should shop around for the best offer. But if you don't see the company going public anytime soon and feel that you can make better use of that money now than what it might be worth 5-10 years from now, go for it.