Private Company Shares and Secondary Sales

What Private Company Shares Actually Are

When a company hasn't yet listed on a public exchange or been acquired, its equity exists in a form that looks like stock on paper but behaves very differently in practice. Founders typically hold common shares issued at incorporation. Employees receive stock options or restricted stock units that convert into shares upon vesting or exercise. Early investors — including venture capital funds and angel backers — often hold preferred shares with rights that sit above common stock in any payout hierarchy.

All of these instruments share one important characteristic: they are not freely tradeable. Unlike shares of a publicly listed company, private shares cannot simply be sold to a willing buyer on an exchange. Every transfer is governed by a web of contractual and legal rules that the holder must understand before taking any action.

Transfer Restrictions: The First Gatekeeper

Before a holder can sell even a single share, the relevant agreements must be read carefully. Shareholder agreements, stock purchase agreements, and company bylaws routinely contain several interlocking restrictions.

• Right of first refusal (ROFR): The company, and sometimes existing investors, have the right to purchase shares at the same price a third-party buyer has offered before that sale can proceed. If the company exercises its ROFR, the intended sale to the outside buyer cannot occur.
• Right of first offer (ROFO): A related mechanism that requires the seller to offer shares to specified parties before soliciting outside buyers at all.
• Co-sale rights (tag-along): Certain investors may have the contractual right to join a sale on the same terms if another large holder is selling.
• Lock-up agreements: Shares received through employment or an investment round may be subject to a lock-up period during which no sale is permitted regardless of buyer interest.
• Board or company consent: Many agreements simply require the company's approval for any transfer, giving management and the board broad discretion to block sales they consider disruptive.

A qualified attorney familiar with private company transactions must review every applicable agreement before a sale is initiated. Violating transfer restrictions can render a transaction void and expose the seller to liability.

Valuation: Two Numbers, One Asset

One of the most disorienting aspects of holding private shares is that there is rarely a single authoritative price. At least two distinct valuations are commonly in circulation, and they can diverge significantly.

The 409A valuation — named for the section of the tax code that governs it — is an independent appraisal of the fair market value of a company's common shares, conducted periodically so the company can set option exercise prices legally. Because this valuation is based on common stock (which sits below preferred stock in the capital structure), it often produces a lower number than headline figures suggest.

The headline or "post-money" valuation is the number that appears in press releases when a venture round closes — for example, "Company X raises at a $2 billion valuation." This figure is typically derived from the price paid for the most recent preferred shares, applied mechanically across all shares outstanding. It does not account for the liquidation preferences, anti-dilution provisions, and other rights that preferred investors hold and that common shareholders do not.

A secondary buyer will typically price common shares at a meaningful discount to the headline valuation, reflecting exactly these structural differences. Sellers who anchor their expectations to press-release numbers often find actual bids disappointing. Families holding shares in late-stage private companies should discuss realistic valuation ranges with advisers experienced in concentrated position analysis before forming expectations about proceeds.

Tender Offers and Secondary Platforms

Liquidity in private shares can arise through several channels, each with different mechanics and implications.

Company-Sponsored Tender Offers

A company may periodically organize a tender offer — a structured process in which the company or an investor group offers to purchase shares from current holders at a set price and within a defined window. Participation is usually voluntary, shares are accepted on a pro-rata basis if demand exceeds supply, and the company controls the price and timing entirely. Tender offers are often the clearest path to liquidity, because the company has pre-approved the transaction and resolved most legal complications in advance.

Secondary Platforms

A number of platforms have emerged that facilitate bilateral transactions between holders of private shares and institutional or accredited buyers. In concept, these marketplaces allow a seller to post interest in selling and connect with vetted buyers. However, the company's ROFR and consent requirements still apply — the platform facilitates the match, but cannot override the underlying shareholder agreements. Pricing on these platforms reflects supply, demand, and buyer due diligence, and may differ materially from any internal valuation.

Direct Negotiated Sales

Families who hold significant positions sometimes negotiate directly with other existing investors, funds active in the secondaries market, or strategic buyers. This route offers more flexibility in structure and pricing but requires the most legal and advisory support.

Tax Considerations Before Any Sale

The tax consequences of selling private shares can be substantial and vary considerably depending on how the shares were acquired, how long they have been held, and their original cost basis.

One area that deserves early attention is whether the shares might qualify as Qualified Small Business Stock under the applicable provisions of the tax code. Shares that meet specific criteria related to the issuing company's size, industry, and form of organization may be eligible for a meaningful capital-gains exclusion if certain holding period and other conditions are satisfied. The rules are detailed and must be evaluated by a qualified CPA or tax attorney — but the potential benefit is large enough that the question must be asked before, not after, a sale.

The cost basis of shares matters enormously. Shares acquired through option exercises, for instance, may carry a basis equal to the exercise price paid, while restricted stock may be valued at grant or vest depending on elections made at the time. Sellers who didn't make or preserve the right records may face unexpected tax complexity. A CPA familiar with private company compensation should reconstruct the basis position before any sale is structured. For a broader discussion of tax issues connected to concentrated private positions, the Qualified Small Business Stock article covers the exclusion mechanics in depth.

State and local taxes add another dimension, particularly for founders and employees who may have lived in different states during the company's growth. The applicable rules around sourcing gains from private share sales differ by jurisdiction, and a tax professional must evaluate the specific facts. Readers exploring residency implications in advance of a sale may find the discussion at State Residency and Domicile useful context.

Information Gaps and Questions to Raise

Holders of private shares often have far less information than they would with a public security. Before initiating any sale process, families and their advisers typically work to clarify the following:

• What is the company's most recent 409A valuation, and when was it conducted?
• What are the liquidation preferences and anti-dilution provisions held by preferred investors, and what do they imply for common shareholder proceeds in realistic exit scenarios?
• Does the company have any stated position on secondary sales — welcoming, neutral, or actively discouraging?
• Are there pending corporate events — a funding round, an IPO filing, an acquisition process — that would affect timing or legality of a sale?
• Have the QSBS eligibility criteria been evaluated by a tax professional?
• What elections, if any, were made at grant or vest (such as a Section 83(b) election), and are the records intact?
• What are the applicable transfer restrictions, and has a securities attorney confirmed the permissibility of the contemplated structure?

Families navigating these questions for the first time are well served by advisers who work regularly in private markets. The broader context of Private Markets and the mechanics of Capital Calls and Distributions may also be useful reference points for understanding how private company ownership differs from public market investing.