Transfer restrictions and lack of market
Public company shares can be sold instantly on an exchange at a known price. Private company shares have no such market: a seller needs to find a buyer, agree a price without a public reference point, and get the transfer approved under the company's articles and any shareholders' agreement, the same restrictions that apply to any transfer of employee shares.
Steps for executing private share transfers
- Check the articles of association and shareholders' agreement for transfer restrictions and pre-emption rights
- Notify the company of intent to sell, triggering any right of first refusal for existing shareholders
- Find a buyer, often another existing investor, a new investor joining via secondary allocation, or a specialist secondary fund
- Agree a price, usually referenced to the most recent priced round, sometimes discounted for lack of marketability
- Obtain board or shareholder approval and update the register of members or equivalent
Pricing a private share sale
Without a public market, sellers usually anchor pricing to the most recent priced funding round, then adjust for time elapsed, company performance since that round, and a discount reflecting the illiquidity and smaller size of a secondary transaction. A share that priced at EUR 10 in the last round might trade at EUR 8 to EUR 9 in a secondary sale to reflect that discount, though this varies with company performance and buyer demand.
Unvested share and exercise cost limitations
Founders with unvested shares generally cannot sell the unvested portion, since it is still subject to the company's repurchase right, a restriction that only shows up once you look past the top-line numbers on a cap table.
Employees holding unexercised options usually need to exercise first, paying the strike price and any tax due at exercise, before they have shares that can be sold. This means a secondary sale can require upfront cash before it generates any proceeds.
Practical questions on selling private shares
- Can a founder sell shares whenever they want?
- No. Almost all private companies restrict share transfers through their articles and shareholders' agreement, requiring consent and honoring pre-emption rights.
- What is a right of first refusal?
- A clause giving existing shareholders the option to buy shares on the same terms before they can be sold to an outside buyer.
- Why might a secondary sale price be lower than the last funding round?
- Because private shares are illiquid and harder to value precisely, buyers often expect a discount compared to the price a new institutional investor pays in a full primary round.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.