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Selling our shares pre-IPO

Lesson in Course: Finance at work (advanced, 4min )

My company is doing well and is planning to raise another round of financing. Do I need to wait for an IPO to sell?

More investors are catching on to the returns they can make by investing in a company before it's publicly listed, and there's a lot more money flowing into the venture capital ecosystem. However, building a successful business is still incredibly difficult, and there are limited options for VCs to invest in. The overabundance in demand for good startups in limited supply creates rare occasions where liquidity events happen before a company chooses to go public.

Tender Offers

A tender offer is a company-sponsored liquidity event where current investors or new investors offer to buy shares from employees. 

Tenders are becoming increasingly popular as companies are staying private for longer and results from investors wanting to invest more money than the company needs. The company sets restrictions on the amount of shares current employees can sell. 

Example of a tender offer

The offer

  • Investor A offers to buy at least 3,000,000 shares, or 5%, of StartupCo's common stock at $100 per share
  • The fair market value (FMV) of StartupCo's stock prior to the tender offer was $90 per share
  • The offer lasts for 20 business days

The limitation

  • As current employees, we can sell up to 10% of our shares while former employees can sell up to 50%

Finding a buyer

Another way of selling our shares is through a secondary market. 

As an employee, we might be approached directly by another investor, without approval from the company, to purchase our shares. We also have the right to look for a buyer ourselves and negotiate a fair price.

An example of a secondary marketplace is PoorFounders.

Other secondary market participants also include professional investors such as Manhattan Venture Partners.

Restrictions to secondary markets

The restrictions on selling to an outsider is written in the Right of First Refusal or ROFR, which is part of the company's equity agreement.

Right of First Refusal (ROFR)

ROFRs protect the company and allow the board to control who can be an owner in the company. 

Under a ROFR, after finding a buyer for our shares, the company has the right to purchase the shares directly from us at the price we’ve negotiated before we actually sell our shares to the buyer we found. As the seller, we still get paid out, but the cash comes from the company if the company enacts the ROFR.

Selling restrictions

In addition to a ROFR, another popular restriction imposed by the company is the restrictions of shares sold. 

As long as we continue working for the company, we can only sell a percentage of our vested shares. This helps the company retain talent so that we don't cash out completely and go work for another company.

These restrictions largely apply to most startup options; however, sometimes the company or secondary market investors have ways to satisfy the restrictions.

Liquidity events are incredible for employees and investors when they happen. It's the first time that the market recognizes the years of hard work, blood, sweat, and tears in the form of a nice payday. As we plan to buy a new home or perhaps a sports car, it's important to remind ourselves that selling incurs taxes and in most circumstances, it doesn't make sense to sell all of our shares at once. 


What is Right of First Refusal (ROFR)?

For private companies -- after finding a buyer and negotiating a price to sell our shares, the company has the right to purchase our shares from us at that price instead of the other buyer. ROFRs are used to protect the company and allow the board to control who can be an owner in the company.

What is Tender Offers?

When current investors or new investors offer to buy shares from employees. 

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