Is Employee Stock Trading a Good Idea?


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If you work for a private company, that is, a company that is not publicly traded, you may very well own shares in the company. But what’s the benefit if you can’t trade them on the stock exchange?

Holding company shares can be a good idea if you believe your business will perform well over the long term. But if you don’t have too much confidence in your business, or just need the extra cash, you may be able to sell your stock compensation. Private equity also gives investors access to fast growing companies before they go public.

How to sell your social capital

If you work for a company that has provided you with equity, such as incentive stock options or restricted stock units, you may be able to sell these ISOs or RSUs, although this depends on the authorization of your company.

Companies such as Forge, ClearList, and EquityZen Inc., among others, specialize in helping employees sell their stocks. These companies allow you to list your stocks and why you want to sell them, and then they work to find a buyer for you. These companies typically charge a fee for the brokerage of the sale of your shares, around 5% of your transaction. These fees can be lower as the amount of the transaction is high.

“The main advantage of selling shares of private companies on a market would be to gain liquidity. The shares of a private company are notoriously illiquid and there are many reasons an investor would want cash, ”Aaron Hatch, certified financial planner and co-founder of Woven Capital in Santa Clara, Calif., Said in an interview. by email. “One of the reasons an investor may want cash is because they have an excessive concentration of their net worth in the stocks of a private company and want to diversify their investments. Another reason an investor may want cash is to achieve a life goal that they need money for, such as buying a house, sending kids to college, or retiring early.

Your ability to sell your stocks may depend on specific company policies or blackout dates. Selling employee shares can also create tax complications, so if you have shares that you are looking to sell, it may be worth talking to a Financial Advisor or tax expert first.

How to buy employee equity

Companies specializing in the trading of private stocks are emerging that allow people who own shares of private companies to sell them to a special type of investor called accredited investors. The Securities and Exchange Commission defines accredited investors as those who have earned income greater than $ 200,000 (or $ 300,000 with a spouse) in each of the previous two years or someone with a net worth greater than $ 1 million. dollars (excluding the value of a principal residence).

“Often times, members of a company have already acquired units, but there may not be an IPO for a long time. So a qualified investor can come in and say, ‘OK, we’ll buy your units from you and wait for the IPO, and we’ll give you something in between,’ says Chris Whalen, a chartered accountant. in Red Bank, New Jersey. “So let’s say they’re sitting at $ 10 per share and the company expects an IPO at $ 100. A qualified investor could come in and offer to pay $ 40 per share.

Buying private equity is a risky business. These assets are called unregistered securities because they are not registered with the SEC. Registration allows investors to access information about the company so that they can form an opinion before investing.

You can still lose your money investing in a registered security, but a registered security is not as risky as unregistered ones. And while there are more risks associated with unregistered securities, they don’t add additional tax complications for buyers, Whalen says. For accredited investors, private equity becomes just another equity investment, he says.

“For someone looking to buy shares of private companies, it is important to be very clear about why you are adding a specific asset to your portfolio and to be honest with yourself about the downside risks. “said Hatch. “Unlike publicly traded companies, private companies often have less public information about the company, so doing your due diligence before investing and understanding the rights and limitations of being a shareholder is very important. “

Another way to buy equity in a business is through a secondary sale or secondary offer. This is when the private shares of a company are sold to the general public after an initial public offering. In these offers, stocks are sold from one investor to another, usually through a stock market.

Negotiating Pay Equity: Is It Right For You?

Whether you are looking to buy or sell, trading employee stocks can get complex. And while there are companies that can make the process easier, they will charge a fee for it. There may also be tax ramifications to selling employee shares, so it may be a good idea to speak to a tax expert before making big decisions.

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Alana Benson writes for NerdWallet. Email:

The article Is Employee Stock Trading a Good Idea? originally appeared on NerdWallet.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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