Secondary Sales of Private Company Stock: Legal Issues for Buyers and Sellers

Buying or selling private-company shares? Review transfer restrictions, ROFRs, securities exemptions, pricing, information rights, and closing steps. The appropriate course depends on the agreements, the parties, and the facts. Below are the issues worth reviewing before making a consequential decision.

What makes a private secondary sale different?

A secondary transaction generally involves an existing shareholder selling securities to another investor rather than the company issuing new shares. The sale may provide liquidity to the seller but usually does not bring new capital into the company. Private-company shares are not as freely tradable as listed public securities.

Check transfer restrictions first

The charter, bylaws, investor rights agreements, equity award documents, and shareholder agreements may impose rights of first refusal, company consent requirements, co-sale rights, lockups, or restrictions on permitted transferees. An attractive price is irrelevant if the transfer cannot be completed on the proposed terms.

Securities-law compliance is separate

Even when the company approves a transfer, the seller must evaluate whether the resale is registered or qualifies for an exemption. The applicable route depends on factors such as how the shares were acquired, affiliate status, holding period, buyer eligibility, solicitation, and available information. Federal and state law may both matter.

Understand the security being purchased

Common shares and preferred shares can have different liquidation rights, voting powers, conversion terms, and information rights. A seller may own shares subject to repurchase rights or other restrictions. Buyers should obtain accurate capitalization information and understand where the purchased security sits in the distribution waterfall.

A discount is not proof of value

Private-company valuation marks may be stale or based on preferred-stock financings that do not translate directly to common-share value. Buyers should consider financial performance, dilution, financing needs, transfer friction, and potential exit timing. A substantial discount to the last round may still represent a poor investment.

Plan the mechanics of closing

The transaction may require a purchase agreement, company waiver or consent, securities-law representations, payment instructions, stock powers, tax documentation, and updates to the stock ledger. Escrow can help coordinate payment with approvals. Confirm who bears transfer taxes, legal costs, and platform fees.

Frequently asked questions

Can an employee sell startup shares without company permission? Often not; review the governing documents. Does a platform listing guarantee transferability? No. Does buying shares give the buyer the seller's information rights? Not necessarily; some rights are personal or subject to assignment conditions.

Discuss Your Situation

If you are considering a transaction or facing a business-law issue, contact Alex Nahai Law to discuss the relevant documents, risks, and available options.

This article provides general information, not legal advice. Reading it does not create an attorney-client relationship. Laws and facts may change; obtain advice tailored to your circumstances.