Public Markets Are the New Private Markets

A not uncommon situation is: You are an employee of a hot tech startup, you own stock in your startup, but you can’t sell it. One reason that you might not be able to sell it is that the company isn’t public yet, so the shares aren’t listed on the stock exchange and there is no easy way to sell them. But that problem can be overcome: People want to buy the stocks of hot private startups, there are online marketplaces and brokers looking for shares, and probably with a bit of effort you could find a buyer.

The other reason that you might not be able to sell your stock is that the company doesn’t let you. It is pretty common for hot private tech startups to limit the sale of their stock: The company might have transfer restrictions (“you can’t sell your stock without our permission”), or a right of first refusal (ROFR, “you can’t sell your stock unless you first offer to sell it back to us at the same price”), or both. Of course these transfer restrictions will go away when the company goes public, but you don’t know when that will be, and it could be a long wait. And so even if you find a buyer, you can’t sell to her without going to the company for permission. And the company might well say no: Those restrictions exist so that the company can control its shareholder base, and it doesn’t want just anyone to own its stock. It wants you to own the stock.