How to Legal Sell Stock in Your Company
Starting a business is a good endeavor for entrepreneurs. However, it needs effort and dedication. Almost any business needs a significant amount of capital. Sole entrepreneurship is not effective in creating an optimal structure. That is why some businesses think of selling ownership through shares of their stock. Now, we will discuss how to sell shares of your company legally.
What Is Private Company Stock?
Also known as corporate stocks, private company stocks refer to the financial asset of investors and issuers. The stock issues enable a company to raise capital. Several investors think of investing in the company stock to get a higher ROI. However, they should understand the characteristics of every stock.
The privately-held companies do not offer their shares to the general public. A particular company issues the shares included in the private company stock. For instance, when there is a limited cash flow, startups rely on equities to compensate their employees.
Equity compensation programs are also found in public agencies to encourage workers to tie a part of their pay to the organization’s earnings.
The significant difference is that private agencies do not need to give financial details to shareholders and investors. The small-sized private companies issue a minimal number of stocks. Thus, the liquidity level of the shares is low, and it is not easy to sell them. Investors will find it lucrative to buy stocks of a private agency that can go public.
How Private Company Stock Works
The process of selling a private company stock is easier than that of public company stock. Investors and employees of a public company can engage a broker to sell shares. On the contrary, the private company stock is represented as a stake. So, any exchange does not list it, and thus, the shareholder has to look for a potential buyer.
Moreover, a company’s approval is essential for the private stock sale. Some organizations do not like to distribute their shares widely.
In the case of startups, some employees are forced to retain the company stock that proves loyalty.
Reasons to Sell Company Stock
When a private company needs to raise funds, it may borrow the amount. However, another solution for it is to sell stocks. Selling stock results in the dilution of ownership. The company does not need to make any repayment with this approach. There are several other reasons for selling the stock.
- Options for some private placements
It generates cash when you sell stocks through some private placement. Investors may also assist the company in its growth. However, in the case of private placement, it is essential to stay compliant with federal and state laws. A company that sells stock should issue information with Private Placement Memorandum and disclose financial details.
- Initial Public Offerings
With continuous growth, a company reaches a level where it has a chance of going public. It can be done with IPO. The reason for selling stock in this way is different for every company. Venture capitalists, investors, and owners like to recover their money. An IPO helps in raising the money for consistent growth in the future.
While pursuing an IPO, the company engages an investment banker to manage it. After settling legal issues, the company can go public.
Other reasons for selling a company stock-
- Attract investors to the company
- The owners can find prestige coming from publicly traded organizations
- To raise money
- To draw the attention of traditional lenders
- To purchase Another firm by using the stock shares.
Complete Versus Partial Sale Stock Your Company
As you like to sell private company stock, you have to choose between partial and complete sales. So, what is a complete sale? You will have no involvement with your business. However, in some cases, an employment contract maintains the relationship. You can set business sales in a way that provides annuity payments.
On the contrary, the partial sale of the stock of a company will help with ownership transitions. It also raises the amount of capital and incentivizes your employees. But, before deciding on the partial sale, you must identify the number of shares to be sold. It is not good to sell several shares, as you may lose control over any decision.
Thus, you can now choose from partial and complete sales of your company stock.
How Do I Sell Private Company Stock?
To sell your private company stock, you need to go through some steps.
- Review shareholders’ agreements and articles of association
Shareholders’ agreements and articles of association of the company must finalize the process to sell the company’s shares. These provisions need a careful review. So, you can establish a good relationship with a lawyer to deal with the review process and move forward.
When a shareholder thinks of selling shares, other shareholders can refuse to purchase them.
- Undergo valuation
A private company’s shares go through valuation in multiple ways. The shareholder’s agreements have to include details about the company share valuation method.
In most cases, shares are valuated by referring to the revenue, profitability, and assets. However, a company’s accountants can carry out the valuation internally.
- Due diligence
The potential buyer tries to know about the company before making a deal. He will check the company’s profits and revenues.
- Agreements on the Share Purchase
The legal deal has to focus on the Share Purchase Agreement. It covers everything related to the agreed price and the buyers’ liabilities. There are also warranties with the agreement
- Stock Transferring Forms
To transfer the share legally to another person, you need a Stock Transfer Form.
- Stamp Duty
The buyer of your share should pay the Stamp Duty.
- Share certificate issuance
The buyer should obtain a share certificate to prove that he owns the company shares.
By selling stocks, you can benefit your company. But, you have to know the selling process. It is safe to hire a lawyer to create a share purchase agreement without any legal complications. The legal representative knows what to include in the agreement.