How to Sell Shares in Private Companies Without Going Public
Enabling Monetization of Private Investments for Employees
and Early Investors While Preserving Founder Control
- The Monetization Challenge
Private company shares aren’t traded on public exchanges, which means they can be harder to buy or sell quickly. Share transfers typically require company approval, are subject to rights of first refusal (ROFRs), and may be restricted by shareholder or employment agreements. This lack of monetization locks in early investors and employees, making it difficult to diversify or access capital. For companies, unmanaged secondary trading can create governance issues, valuation volatility, and loss of cap-table control.
Why It Matters
- Employees: Equity is a key component of compensation but often lacks near-term realizable value.
- Early Investors: Need partial liquidity to redeploy capital or de-risk portfolios.
- Companies/Founders: Offering partial liquidity helps with retention, recruitment, and morale but must be done without compromising governance or ownership control.
- Common Monetization Paths for Private Companies
- Company Buybacks: The company repurchases shares directly from employees or investors.
- Tender Offers: A structured event where approved investors buy shares from shareholders.
- Secondary Market Trading: Shareholders sell shares to accredited buyers through regulated private platforms.
- Structured Liquidity Programs: Controlled liquidity windows scheduled periodically for approved participants.
- Traditional Exits (IPO/Acquisition): Remain long-term routes but are increasingly delayed as firms stay private longer.
These methods vary in flexibility, cost, and control. Founders must balance providing liquidity with maintaining governance discipline.
- Designing a Private Liquidity Program
- Cap Table Control: Restrict who can own shares; require company approval for all transfers.
- Valuation Discipline: Establish a transparent pricing mechanism to prevent undervaluation.
- Regulatory Compliance: Ensure adherence to SEC and FINRA rules, including KYC/AML checks.
- Liquidity Schedule: Limit trading to structured “windows” (e.g., annual or semi-annual).
- Governance Protection: Maintain voting rights, share-class integrity, and ownership concentration.
- Clear Communication: Manage perceptions large insider sales can signal uncertainty.
- How Rialto Markets Enables Controlled Liquidity
Rialto Markets, LLC, Member FINRA/SIPC, provides regulated infrastructure supporting the secondary trading of private shares through its SEC-registered Alternative Trading System (ATS).
Key Features
- Walled-Garden Platform: A permissioned, company-controlled market where issuers define who can buy, sell, and at what price.
- Regulated Settlement: Full compliance with KYC/AML and securities-transfer protocols.
- Issuer Control: Companies customize trading rules, approval workflows, and valuation parameters.
- Enterprise Solutions: White-label platforms that allow issuers to retain branding, investor community, and data ownership.
This structure can provide opportunities for shareholder liquidity in a regulated and issuer-controlled environment, subject to applicable securities laws and company approvals.
- Implementation Roadmap
- Set Objectives: Define why liquidity is needed retention, partial exit, or investor rotation.
- Establish Rules: Determine who can sell, eligibility, share classes, and sale limits.
- Update Governance: Confirm ROFR, transfer restrictions, and cap-table readiness.
- Launch Platform: Integrate Rialto Markets’ ATS with your transfer agent and compliance systems. Price Setting: Establish a valuation process for trades under company oversight.
- Facilitate potential trades between qualified buyers and sellers under issuer-approved conditions.
- Monitor & Maintain: Track cap-table changes, trading volumes, and ongoing compliance.
- Preserving Founder and Board Control
Rialto’s structure lets founders maintain authority over ownership and decision-making by:
- Limiting access to pre-approved buyers (institutional or accredited).
- Retaining transfer approval and ROFR rights.
- Enforcing valuation parameters and trade windows.
- Restricting total volume traded to protect ownership concentration.
- Preserving voting and governance rights regardless of liquidity events.
- Benefits and Considerations
Benefits
For Employees/Investors:
- Potential resale opportunities are possible, subject to issuer approval, regulatory requirements and market demand. Liquidity is not guaranteed.
- Opportunity to diversify holdings and realize value.
For Companies/Founders:
- May support talent retention and recruiting.
- Provide potential opportunity for liquidity while maintaining governance controls.
- May improve transparency and demonstrates governance readiness to investors.
For the Market:
Contributes to development of compliant infrastructure for private-share trading.
Key Considerations
- Valuation & Signaling Risk: Secondary prices may send unintended market signals.
- Regulatory Complexity: Transactions must comply with securities laws.
- Operational Cost: Setting up and maintaining a secondary program involves legal and tech expenses.
- Tax Implications: Sellers may face capital gains or AMT exposure.
- Why Work With Rialto Markets
Rialto Markets, LLC provides a regulated framework for secondary liquidity through its FINRA-member broker-dealer and SEC-registered ATS that:
- Handles compliance, investor matching, and settlement.
- Allows companies to define participation rules and maintain cap-table integrity.
- Supports transparency and issuer-defined governance through a regulated ATS structure.
- Facilitates structured, compliant liquidity events under company oversight and applicable regulations.
Monetizing private company shares may no longer require an IPO or acquisition. Platforms like ours can facilitate structured and compliant liquidity events for eligible participants, subject to applicable securities laws and company approval. Such programs are designed to preserve governance, ownership and control.
When appropriately structured, monetization of private investments can serve as a strategic tool that can help support company culture, attract top talent, and build investor trust while maintaining regulatory compliance.
Disclaimer:
Rialto Markets, LLC, Member FINRA/SIPC, operates an SEC-registered Alternative Trading System (ATS). Rialto Transfer Agent Services, LLC, is an SEC-registered transfer agent. This communication is for informational purposes only and does not constitute an offer to buy or sell securities. Any securities transactions are conducted pursuant to exemptions from registration and applicable SEC and FINRA rules. Investing in private securities involves risk, including possible loss of principal and illiquidity.