For employees and early investors in a private company, equity can become a large part of net worth long before it can be easily sold. Waiting for an IPO or acquisition is one path, but the timing is uncertain, and some people look for ways to turn part of their equity into cash earlier.
Selling before an IPO is possible in some cases, but it involves company rules, tax consequences, and pricing questions that differ from selling public stock. This guide explains how pre-IPO sales generally work and what to understand before taking any steps.
First, Options Are Not Shares
Stock options give you the right to buy shares at a set exercise price. In most cases, the options themselves cannot be sold or transferred. To sell, you generally need to exercise the options first, pay the exercise price, and then sell the resulting shares if the company allows it.
That means a pre-IPO sale often involves two steps, each with its own costs and tax effects:
Exercise: You pay the exercise price, and possibly tax, to acquire the shares.
Sale: You transfer the shares to a buyer, subject to company approval and any transfer restrictions.
Company Restrictions to Review
Private companies usually control who can own their stock. Before considering a sale, it helps to read your equity documents and the company's bylaws.
Transfer restrictions: Some companies prohibit or limit sales of shares before an IPO.
Right of first refusal: The company or existing investors may have the right to buy your shares on the same terms offered by an outside buyer.
Board approval: Transfers may require approval from the board or company counsel.
Information limits: Companies may restrict the financial information that can be shared with prospective buyers.
Lockup agreements: If an IPO occurs, shares are often subject to a lockup period during which they cannot be sold.
Ways Private Company Shares Are Sold
Company-Sponsored Tender Offers
Some companies arrange tender offers, in which the company or outside investors offer to buy shares from employees at a set price during a set window. Participation is usually voluntary, and there may be limits on how much each person can sell.
Secondary Transactions
In a secondary sale, an employee sells shares directly to an outside investor, sometimes through an intermediary or online marketplace. These sales generally still require company consent and are subject to rights of first refusal.
Company Buybacks
Occasionally, a company may repurchase shares from employees or former employees, often at a price based on a recent valuation.
Acquisition or Merger
If the company is acquired, equity may be converted into cash, acquirer stock, or a mix. This is not a sale you control, but it is another path to liquidity.
How Pricing Works
Private shares do not have a daily market price. Values can be influenced by several factors:
409A valuation: The independent valuation used to set option exercise prices, which may differ from what investors pay.
Preferred stock prices: Investors in funding rounds usually buy preferred shares with rights that common shareholders do not have.
Discounts: Secondary buyers often apply discounts for illiquidity and limited information.
Demand: Interest from buyers can vary widely from one company to another.
Tax Considerations
Taxes depend on the type of equity and the timing of each step.
Nonqualified Stock Options (NSOs)
When you exercise NSOs, the difference between the fair market value and the exercise price is generally taxed as ordinary income and, for employees, subject to payroll taxes. A later sale creates a capital gain or loss based on the price change after exercise.
Incentive Stock Options (ISOs)
Exercising ISOs does not usually create regular income tax, but the spread can count toward the alternative minimum tax. To receive favorable long-term capital gains treatment, shares generally must be held at least two years from the grant date and one year from exercise. Selling sooner, as can happen in a quick pre-IPO sale, is a disqualifying disposition, and part of the gain is taxed as ordinary income.
Early Exercise and 83(b) Elections
Some companies allow employees to exercise before options vest. Filing an 83(b) election within 30 days can start the capital gains holding period earlier, but it also means paying any tax up front and accepting the risk that the shares lose value.
Qualified Small Business Stock
Shares in certain C corporations may qualify for a partial or full exclusion of federal gain if holding period and other requirements are met. California does not follow this federal exclusion.
State Taxes
California taxes capital gains as ordinary income and may tax equity income tied to work performed in the state, even after a move.
If You Leave the Company
Changing jobs can force decisions about private company equity. Option plans commonly give departing employees a limited window, often 90 days, to exercise vested options before they expire. ISOs that are not exercised within three months of leaving employment generally lose their ISO status and are treated as NSOs. Some companies offer longer post-termination exercise periods. Reviewing these terms before a job change can help you weigh whether to exercise, how to pay for it, and how the timing affects taxes.
Questions to Ask Before Selling
What am I allowed to sell? Review your option agreement, stock plan, and company policies.
How much should stay? Consider how much exposure to the company you want to keep if it succeeds or struggles.
What will the full cost be? Include the exercise price, taxes, transaction fees, and any discount to fair value.
What is the timing? Check ISO holding periods, option expiration dates, and post-termination exercise windows.
What else is happening this year? Other income can change your tax bracket and alternative minimum tax exposure.
Alternatives to Selling
Some employees consider other approaches to liquidity or to managing exercise costs, such as waiting for a tender offer, exercising gradually over several years, or using financing arrangements that provide cash for exercise costs in exchange for a share of future proceeds. Each comes with its own costs, risks, and tax rules.
How Auric Works With Private Company Equity Holders
Auric Capital Partners' restricted and non-restricted stock strategies are designed to help clients navigate vesting schedules, tax implications, and diversification opportunities. Its monetizing strategies focus on identifying opportunities to convert illiquid assets into accessible capital, and its concentrated stock work centers on managing exposure and balancing risk.
For executives, early employees, and founders, that work is coordinated with the client's CPA and legal counsel, who review company documents and tax filings. Read more about us.
Get Started
If a large share of your net worth is tied up in private company stock, a conversation can help you understand your choices before a window opens. Reach out to our team to start planning.
Frequently Asked Questions
Can you sell stock options before an IPO?
Options themselves generally cannot be sold. You usually need to exercise them first and then sell the shares, if the company allows transfers. Some companies offer tender offers that let employees sell shares.
What is a tender offer for private company stock?
A tender offer is an organized opportunity, often arranged by the company, for employees and other shareholders to sell shares at a set price during a defined window.
How are pre-IPO stock sales taxed?
It depends on the type of equity. NSO exercises generally create ordinary income, while ISO exercises can affect the alternative minimum tax. A sale after exercise generally creates a capital gain or loss, and selling ISO shares early can convert part of the gain to ordinary income.
What is a right of first refusal?
It is a right held by the company or certain investors to buy your shares on the same terms you have negotiated with an outside buyer before the sale can go through.
Do secondary buyers pay full price for private shares?
Prices vary. Buyers often apply discounts for illiquidity and limited information, so secondary prices may be below recent funding round prices.
This content is for educational and informational purposes only and should not be considered investment, tax, or legal advice. It is not a recommendation to buy or sell any security or to adopt any particular investment strategy. Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results, and no strategy can guarantee a profit or protect against loss. Please consult with a qualified professional about your individual situation. Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Adviser. Auric Capital Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.
