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I joined a startup a few months ago which I am now leaving. It is a small startup where I was the first employee. It is still a private company with a lot of potential and some venture capital firms are looking for investing in it. Nothing concrete as of yet though.

While I was there, I accumulated 0.5% of the shares of the company but the CEO has said offered to re-buy them off me, trying to convince me saying that it's really hard to sell a small portion of a private company.

Now, is that true? If I refuse to sell him my shares, will I be stuck with them?

Should I sell him my shares right now and miss on the potential the company has?

Personally, I don't need the money I would receive from those shared right now. So that should not drive my decision.

Thank you.

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  • It may depend heavily on the value of the company. Half a percent of a million probably attracts a different market than half a percent of a few billion. – dwizum Mar 1 '19 at 16:42
  • @dwizum If it is a start up, odds are it isn't valued at a billion. Especially if its first employee joined a few months ago, and is now leaving (and wondering what to do with his 1/2%. Of course, there is always an exception; but, the reality is that this company probably didn't clear 333 Million in revenue within the first two months. – Edwin Buck Nov 27 '20 at 5:26
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Yes, they're going to be hard to sell. It may still be worth holding on to them but it's unlikely that you're going to be selling to someone other than the CEO until the company goes public.

  • There aren't a lot of people that want 0.5% of a startup. If someone is a venture capitalist, they're going to be interested in getting a large fraction of the company not a tiny sliver. If someone is not a venture capitalist, they're generally not going to be buying shares in tiny private companies.
  • Getting in contact with people that might want to buy your shares is non-trivial. There may be a dentist in Peoria that would be interested in taking a flyer on your shares but good luck getting matched up.
  • If you do find someone that would potentially be interested, they're going to want to do things like look at the company books before investing. If the company is selling shares, it has every incentive to make that nice and easy. If you're trying to sell your shares, the company doesn't have to be nearly as quick to open things up. Normally, a buyer would be looking for a third party valuation on the company which is not cheap and something you'd need to spring for. Unless the company is extremely valuable, getting a valuation is going to cost you a large fraction of the value of your shares.
  • Frequently, there are restrictions on who you can sell shares in a private company to in order to keep the company closely held. So if you do manage to find a buyer, get the financials, and convince a buyer that they want to invest the company may have to agree to allow you to sell. And the company may not want its shares widely distributed.

Of course, the fact that an investment is relatively illiquid doesn't mean that it's a bad investment. Most startups fail and most startup equity becomes worthless but some startups succeed and make their shareholders very very wealthy. If you don't need the money and this equity represents a small fraction of your net worth, it may make perfect sense to hold on to your shares hoping that a market eventually develops (or the CEO comes back in a few years offering more). Just make sure that you understand that it's an extremely risky investment.

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Personally, I don't need the money I would receive from those shared right now. So that should not drive my decision.

Why not take the risk then. If the company shares are well priced and have good value in the future you will have no problem selling them if the company does reach it's full potential.

The CEO obviously wants them back for a reason, he won't be doing it just simply to do you a favor of getting rid of them.

Think of it as an investment for your future that may pay a reasonable return for when you may need/want the money. You could even sell them back to the company when they're worth more. A lot of companies like to be in control of more of their shares as they can sell them off for higher prices.

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  • Thank you for your answer. My train of though leads me to the same conclusion. Still. I am wondering if it is true that a low percentage of ownership of a private company is hard to sell. Is it hard to find buyers? Because if it is true, than might consider the offer. I find it strange that nobody would want to buy something that they consider a good investment. – Jean-Francois Mar 1 '19 at 14:32
  • The difficulty of finding buyers depends on a lot of factors: the industry, the market, the price, the success of the company. Essentially if you sell something at a favorable valuation to buyers, then the size of shares shouldn’t be any more-or-less difficult. Keep in mind, for public companies many people own less than 0.5% (Buffet owns 5% of Apple, which is considered large). If you want, I’ll take them off your hands ;) – vol7ron Mar 1 '19 at 17:46
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    +1 for "The CEO obviously wants them back for a reason". What might be going on here is that the CEO has trouble bringing in the VCs because the ownership of the company is already spread out among too many people. – tmh Mar 1 '19 at 18:21
  • If the company sells to a larger player (you won't really get to participate in the choice; because 0.5%); but, you will get paid (forced to sell). Typically forced sells are a bit higher than the street price (hard to sell or not) so people are more inclined to go with the sale, instead of against it. "The CEO obviously wants them back for a reason" might be a reason as small as seeing a quick 20% return on investment, or higher. – Edwin Buck Mar 1 '19 at 23:00
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the CEO has said offered to re-buy [my position], trying to convince me that it's really hard to sell a small portion of a private company.

That is probably true, but your main concerns should be that (A) there is a 95+% probability that your shares of the company will be worthless in five years (I know it looks good... they all do)
and (B) it is even harder to sell a share of a private company if they don't cooperate (refuse to give or give outdated/unclear financials).

I realize that you don't need the money, but I'd tell you to sell them back for two reasons:

  1. The goodwill that you gain; the CEO wants them back and it is a smaller world than you'd think.

  2. When the VC money comes in you'll probably own a lot less than a half percent because the VC will be sold newly issued shares.
    That won't be true if your shares are "undilutable", but if they are the VC money is even less likely to show up (maybe why the CEO is so keen to get them back).

You do, I assume, have that ownership - that's why the CEO is offering you money.
But you likely have less leverage than you think you do.

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