Escrow: Protecting Both Buyers and Sellers

Escrow is a neutral third party that holds assets (like money or stock) during a transaction, ensuring both the buyer and seller fulfill their obligations before anything changes hands. Think of it as a trusted referee making sure everyone plays fair. It minimizes risk for everyone involved.

How Escrow Benefits Buyers:

• Verification: Escrow confirms the seller actually owns the assets being sold and that those assets are free of any undisclosed liens or encumbrances. This protects you from buying something the seller doesn’t have the right to sell.
• Security: Your money isn’t released to the seller until all agreed-upon conditions are met (e.g., transfer of the shares, necessary paperwork signed). This safeguards your funds from a seller who might take the money and run.
• Peace of Mind: Knowing a neutral party is overseeing the process reduces stress and builds trust, even if you don’t know the seller personally.

How Escrow Benefits Sellers:

• Payment Guarantee: Once the buyer’s funds are in escrow, you have assurance they’re available and won’t disappear before the sale closes. No last-minute buyer financing hiccups!
• Compliance: Escrow ensures all required legal and regulatory steps are followed, protecting you from future disputes or liabilities.
• Efficient Transfer: Escrow streamlines the transfer process by handling the exchange of funds and assets, reducing the back-and-forth and potential delays.

What Happens in a Typical Escrow Process for Private Stock?

1. Agreement: Buyer and seller agree on terms (price, number of shares, etc.) and sign a purchase agreement.
2. Escrow Opens: An escrow account is established with a chosen escrow agent (often a lawyer or specialized firm).
3. Buyer Deposits Funds: The buyer transfers the agreed-upon purchase price into the escrow account.
4. Seller Deposits Shares: The seller deposits or transfers the shares into the escrow account or provides instructions for their transfer. This often involves coordination with the company’s transfer agent.
5. Conditions Met: The escrow agent verifies all conditions of the sale are met, including paperwork, signatures, and any necessary approvals.
6. Funds and Shares Released: Once all conditions are satisfied, the escrow agent releases the funds to the seller and the shares to the buyer.
7. Escrow Closes: The escrow account is closed, and the transaction is complete.

Common Questions about Escrow:

• Who chooses the escrow agent? Often the buyer and seller mutually agree. Sometimes one party covers the escrow fees as part of the negotiation.
• How long does the escrow process take? This varies based on the complexity of the transaction, but it typically ranges from a few days to a couple of weeks.
• Is escrow required for private stock sales? While not always legally mandated, using escrow is highly recommended to protect both parties in these transactions, given their inherent complexities.

So here’s what we covered:

• How escrow protects both buyers and sellers.
• The typical steps in an escrow process for private stock.
• Answers to common questions about escrow.