For venture (VC) or secondaries funds, employees of a private/VC-backed company, or other investors with a private equity stake in a company they wish to sell, the limited IPO activity market in the last year has made selling these shares challenging. However, we believe there are green shoots in select areas of the capital market, and now may be the right time to consider exiting those positions. Given our point in the calendar year, and with several large IPOs having hit the market, we outline three key considerations for anyone looking to sell their private shares.
- Timing. The time it takes to close a secondary transaction in the venture landscape is a significant consideration for sellers, as it can widely differ between companies. Some company’s close trades in a matter of days, while some can take up to six months.
- Transfer restrictions. Transfer restrictions come in many shapes and sizes. In some instances, they are in the form of joinder agreements upon exercise and sale, in others, they are in the by-laws for the company. As well, they can also be part of your exercise agreement and/or your stock option plan.
- Taxes. Every venture backed company has an internally held 409a valuation. This valuation will often change on an annual or biannual basis. The internal 409a valuation of your company will impact your tax obligation upon exercise and sale of your stock.
In addition, the types of equity grants—Incentive Stock Options, Non-Qualified Stock Options, and Restricted Stock Units—and the transactability of your equity will differ and will impact any tax obligation.
The Path Ahead
At William Blair, the Private Shares Trading team prides itself on discretion and expertise in this space, and they may be able to advise on your situation as they have closed transactions in over 300 companies. Our team can help advise on the duration it may take to close on a company specific basis. And while speaking with legal counsel and the equity department at your company is the best way to fully understand your transfer restrictions, our team has vast experience transacting VC-backed stock.
From a valuation perspective, we think 409a valuations could increase across the space in the next revision window early next year, so there could be benefits to exercising against depressed 409a valuations before that happens. However, we encourage you to always speak with your tax advisor before doing any type of planned exercise and sale to understand any potential tax obligation.