Lesson 6

Knowledge check

  • What is the definition of liquidity?
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  • What is it called when a company’s shares become eligible for sale in the public markets, a.k.a. the stock market?
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  • What is the primary benefit of a tender offer?
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Video transcript

I remember when my friend gave me a call and he was like, “Nathania, I bought a house.” And I remember thinking, “Whoa, those shares that he had, that is what got him the house.” Up until this point, I didn’t really think much of my shares. I knew that they were vesting, but they were just there. And then all of a sudden, when he told me that, I realized that I could actually take my ownership and my shares and turn it into something tangible and something real. 

In this lesson, we’re going to talk about selling your shares. What are the different ways you can sell? And what kind of things do you need to consider when you do?

Selling your shares is a really personal decision. It’s not as easy as just finding a buyer and selling your shares to them. There are a bunch of different factors you need to consider. First of all: Can these shares even be sold or transferred? Private company shares are usually subject to a lot of restrictions on sales and transfers. The second question: Do you need the cash? If not, you might want to take a look and see: Is the value of the shares increasing over time? In other words, is the stock going up? Also: Will this be your only chance to sell? Do you know if you’ll have more chances to sell in the future? Or the really big one: What are the tax implications associated with selling? Because remember—selling your shares may implicate capital gains, which means you’re likely to have a tax impact.

For a lot of employees, a big portion of their net worth is tied up in these shares. So selling is a really important decision, and it’s a really personal one, too. 

There are a few different ways that you can actually sell your shares. If you work for a public company, you can usually sell shares right when you vest them—just sell them in the stock market. Another way of saying this is: Public shares are pretty liquid. This term “liquid” means they can easily turn into cash. 

Private company shares, on the other hand, are not very liquid. So it’s a lot harder to sell your shares when you have shares of a private company. Additionally, most private companies strongly restrict sale and transfer of shares outside of specific company-sponsored events.

Employees of private companies can typically sell their shares in three common ways. There’s an IPO, which is when their company goes public, there’s M&A, which is when their company gets bought by another entity or merges with another company, or there’s a tender offer, which is when their own company actually buys the shares back from them. 

IPOs are definitely the most publicized of the three. They’re the stories you read in the news like “Uber went public” or “Airbnb went public.” What an IPO is, is when a private company offers shares to the public at large. So they list on the stock exchange, and now anybody can buy and sell their stock. For you, the employee, this also means you can sell your shares to the public on the stock market.

But here’s the thing: There are typically some restrictions. You can’t just sell your shares right away. There’s usually a thing called a lock-up period, which means you’re restricted from selling your shares for a set period of time after the IPO. Typically, this lockup period is six months. So once the IPO happens, you have to wait six months before you can sell. And a quick note: There’s been some negotiation on this period, and some companies have a shorter or no lockup period at all. After the lockup period’s over, all good. You can sell your shares without restriction. 

M&A stands for mergers and acquisitions. This is another really common way for employees to sell shares. Usually, it’s when another company comes in and buys out or merges with the company that you work for. A lot of the time, the acquiring company will pay cash for the outstanding shares and you’ll get a lump sum payout. However, it’s often the case that employee shareholders of common stock are the very last to get paid out. In M&A transactions, it’s not uncommon to see even early employees walk away with very little. It all depends on the nature of the deal. But then, some acquisitions are actually paid for with the acquiring company stock—meaning instead of cash, you’ll get shares of stock from the acquiring company.

So yeah, if your company IPOs or gets acquired, it can potentially be a great thing. But the problem with IPOs and M&As is you usually have to wait a long time before the exit happens. Your company might stay private for 10 years. You see flashy IPOs in the news all the time, but the truth is these days, private companies are just staying private a lot longer. Airbnb, for example: That was a big IPO, but they were a 12-year-old company before they decided to go public. So that’s a long time to wait before being able to sell your shares.

One of the ways that a company can alleviate this time is through a tender offer. So what is a tender offer? Well, it’s a broad offer by your company or a third party to purchase a set amount of the company shares at a fixed price. Or, to put it more simply. It means you have the ability to sell your shares for cash while the company is still private, not all companies will provide a tender offer. And even when they do, they’re usually a one-off or at best, they’re pretty sporadic. 

So in the end, up to this point, there hasn’t really been a consistent or reliable way to sell your shares or become liquid. At Carta, we’re working every day to try and change that. Unlocking liquidity for the private market feels like this revolutionary idea—but here at Carta, what we hope is that in the future, it’ll be totally normal. 

We believe that regular access to liquidity is a right for all employees who hold shares in their company. We also believe employees have the right to a clear job offer with clear numbers explaining their ownership.

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