Private Company

A private company is one whose shares are not traded on a public exchange. Think of it like a members-only club: ownership is restricted, and getting in (or out) requires a different process than buying or selling shares of publicly traded behemoths like Apple or Google.

Why stay private?

There are several reasons why a company might choose to remain private:

• Control: Founders and early investors retain more control over the company’s direction without the pressures of quarterly earnings reports and shareholder demands that public companies face.
• Flexibility: Private companies have more flexibility in their operations and decision-making. They don’t need to disclose as much information publicly, allowing them to adapt more quickly to changing market conditions.
• Cost: Going public is expensive! The IPO process requires significant legal, accounting, and marketing expenses. Staying private avoids these costs, allowing companies to reinvest capital into growth.
• Focus: Without the distractions of the public markets, private companies can maintain a sharper focus on long-term goals and strategies.

How do shares change hands in a private company?

While not traded publicly, private company shares can change hands. These transactions occur through the private market, often facilitated by platforms like Earlyasset. Common scenarios include:

• Employee stock option exercises: Employees who hold stock options can buy company shares at a pre-determined price (the exercise price).
• Primary issuance: The company itself issues new shares, typically to raise capital from investors. This happens during funding rounds (e.g., Seed, Series A, Series B).
• Secondary transactions: Existing shareholders, like founders, employees, or early investors, sell some or all of their shares to other investors. This is where Earlyasset comes in, helping facilitate these secondary market transactions. Liquidity motives for selling can range from life events to diversification.

What are the downsides of being private?

• Limited Liquidity: Selling shares in a private company is generally harder and less frequent than selling public stock. It’s important to understand that private company shares are illiquid assets.
• Less Transparency: Less publicly available information can make it more challenging to determine a fair market value for the company’s shares. Earlyasset’s Instant Offer feature addresses this challenge by providing indicative pricing.
• Higher Risk: Private companies are generally considered riskier investments than public companies due to their limited operating history, lack of regulatory scrutiny, and potential for financial instability.

So here’s what we covered:

• Definition of a private company
• Advantages and disadvantages of remaining private
• How private company shares can change hands
• The role of the private market and platforms like Earlyasset