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So I have a 3% share of a tech company and saw my $20,000 become $1.8 million. I'm not planning on cashing it now, but maybe in the future. I was wondering if selling it would harm the company that it would be bad to sell it for my personal needs.

I invested $20,000 into the company, the company is now worth about $60 million. Shares aren't publicly traded. So I guess that means my initial investment is worth about $1.8 million? Sorry I'm just calculating based on the math I know. I'm planning on selling it after a 10-20 years. I'm not even sure about anything right now, I just am curious about what happens to the investment I made.

AbraCadaver
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Andrew Youn
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    what do you want to happen in near future (~months) and far future (~years)? – aaaaa says reinstate Monica Oct 29 '19 at 17:02
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    Is it publicly traded? – mhoran_psprep Oct 29 '19 at 17:06
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    You should probably also factor the potential impact of capital gains taxes into whatever you decide to do with these shares. Some courses of action may lead to paying more tax than others. – timday Oct 29 '19 at 17:47
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    Friendly reminder that 1.8m in a fund with only a 4% return (which is darned easy to get safely) is a residual income of $6k a month. Of course, if this company is on the rise, maybe you can wait for it to be worth even more, but still, you could literally never work again by cashing it out now. Jjuusstt sayin'. – corsiKa Oct 30 '19 at 03:44
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    Don't forget to diversify. You probably want to keep some of those shares as they may continue to grow a lot. But you also want to make sure you're safe in case of a crash (general or just of that company). Also, given the amount, you probably want to talk to a trusted financial adviser. – jcaron Oct 30 '19 at 08:49
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    When you say that you can sell for 1.8 MUSD, do you mean that in the literal sense of knowing you can sell it for that much, or in the sense of the company's evaluation being such that a 3% cut of it's currently worth 1.8 MUSD, such that if you can sell at that evaluation, then you'd get 1.8 MUSD? – Nat Oct 30 '19 at 12:53
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    No matter what happens, don't forget CGT :) – VulfCompressor Oct 30 '19 at 23:37
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    Who are you, in relation to the company? Just a random member of the public, or the CEO/founder/high ranking exec? – BruceWayne Oct 31 '19 at 01:36
  • So I have no clue about this finance stuff, which is why I'm asking this question. So I invested 20,000 into the company, the company is now worth about 60 million. Shares aren't publicly traded. So I geuss that means my initial investment is worth? about 1.8 million? Sorry I'm just calculating based on the math I know. I'm planning on selling it after a 10~20 years. I'm not even sure about anything right now, I just am curious about what happens to the investment I made. – Andrew Youn Oct 31 '19 at 12:58
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    "the company is now worth about 60 million" -- how are you calculating this? If it's publicly traded, then it's (relatively) easy. If it's not, then that number's not based in anything solid. Remember: your shares are only worth what someone's prepared to pay for them. – Roger Lipscombe Oct 31 '19 at 14:21

5 Answers5

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You're selling the shares to someone else (in exchange for cash), not exchanging the shares for company cash.

Thus, the only way this could harm the company is by selling to someone who wants to take over the company (fine as far as it goes) but would poorly run the company.

RonJohn
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    If the company wants to make a secondary offering, and OP has added to the supply of shares, this would somewhat lower the price the company can get. – nanoman Oct 29 '19 at 19:27
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    @nanoman OP can't add to the supply of the shares. Only the company can issue new shares. – corsiKa Oct 30 '19 at 01:02
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    @corsiKa OP's decision to sell would incrementally increase the supply accessible to the rest of the market, and compete with the company's secondary offering. Regardless of how you define supply, hopefully we agree that the price will tend to go down from OP's sale and this is a scenario where that could hurt the company. – nanoman Oct 30 '19 at 01:55
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    @nanoman By virtue of it existing and having value it is already accessible to the rest of the market. If it wasn't accessible to the market, it wouldn't have a value already. And no, the price should not go down because no matter who owns the shares the company is still worth the same amount. – corsiKa Oct 30 '19 at 03:41
  • How do you know who he is selling it to? Maybe he is selling it back to the company? If traded publicly, what might such a dump on the market do to the price? – gosuto Oct 30 '19 at 06:38
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    @corsiKa "the price should not go down because no matter who owns the shares the company is still worth the same amount" -- perhaps you are assuming perfect liquidity. In reality, a large buy or sell order has an impact on the market price. This can often be neglected for individual investors, but the impact of selling 3% of the company (especially all at once) would likely be noticeable. – nanoman Oct 30 '19 at 07:10
  • For various reasons, companies like it when their shares increase in value. For one thing, it pleases the stockholder and suggests that top management is "doing its job". But the company itself is not directly affected. So if selling your shares all at a wump causes the stock price to go down, then you are causing a form of harm. But it's minor. Another factor: selling off the shares you own in a company you work for can be seen as a sign of lack of confidence in the company. This could make you seem "disloyal", although in actual practice it's just an investment decision. – Jennifer Oct 30 '19 at 09:10
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    @Jennifer The when the price of shares in a company goes down it has one direct impact on the company: it means that new issues are going to be worth less. The net effect is that the companies cost of capital increases. This can be a big deal for a growth company. – JimmyJames Oct 30 '19 at 13:42
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    @nanoman I have invested in, worked for, and run my own tech startups for years. I have never seen the valuation of one go down because an early investor cashed out. The startup OP is invested in is worth $60 million. This can still grow and plenty of capital firms are looking to get in on that. If anything, price goes up because it usually goes to a capital firm and with that comes activism, experience, and synergy with other startups partially owned by the firm. This will likely never hit an exchange (even if the firm IS public!) but rather it would be sold privately. – corsiKa Oct 30 '19 at 15:03
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    @JimmyJames you are right. – Jennifer Oct 30 '19 at 17:27
  • @corsiKa: that's not how markets work. My shares are not available to the market until I put them up for sale (am willing to part with them). At that point, they become a part of the supply, and the balance between supply and demand may change. But that balance does not change UNTIL I put them up for sale. – nomen Oct 30 '19 at 19:18
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    @nomen That's not how private companies work. In general, a private company's valuation is determined NOT by how much is available on the open market, but rather by the financial details of the company itself. Unless you have some kind of panic sale of multiple private investors, a single person selling their stake will have zero impact on the valuation. – corsiKa Oct 30 '19 at 19:33
  • @corsiKa: the financial ramifications for a private company are much larger than for a publically traded one. Consider that the private company may have to finance the purchase, and all that this entails (duration risk, etc). Yes, you can get to the point where we're talking about Miller-Modigliani, but either way, management will have to implement real transactions with real costs to reach the ideal you are supposing. – nomen Oct 30 '19 at 20:57
  • @corsiKa That's one valuation that has some meaning. But another valuation that has a lot of meaning is the number of shares outstanding times the last price at which a share changed hands on the secondary market. The OP selling will add to the supply on the secondary market and thus put at least some downward pressure on that secondary market price. – David Schwartz Nov 02 '19 at 04:34
  • @DavidSchwartz Regardless of whether or not OP sells or keeps the shares they are still listed as outstanding, and are already factored into the market price thusly. It really isn't a contributing factor, especially for how small it is. – corsiKa Nov 02 '19 at 05:04
  • 3% of a company's outstanding shares is not really all that small, especially for a privately held company where the number of shares that are available on the secondary market is probably very small. This could easily double or even triple the number of shares available on the only secondary market the shares are trading on. (Assuming he offered them all at once at a price low enough to sell them within a month or so.) Data on privately-held companies is also often very scarce so this action (if public) might be one of few data points those looking to buy the shares on secondary markets have. – David Schwartz Nov 02 '19 at 16:46
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It depends on how the shares are sold.

Let's say the share price right now is $10, exactly. Shares sold for $10.01 do not sell and shares sold at $9.99 are a loss to the seller.

Chances are you won't be able to sell all shares at $10/share because there won't be that many buyers looking to purchase that many shares. So you decide to sell these shares at $9.50/share to cash out, despite taking a loss.

This does at least three things:

  • Saturates the market of that company's purchasable shares
  • Lowers the average sale price of each share
  • May be perceived (by potential buyers) as a loss of confidence of a major investor

This does decrease the average price of each share (now shareholders and the company may only be able to sell their shares at $9.75) due to a lower average purchase price and a saturated market for this company's shares.

If this would "harm" the company is situational. The answer, almost always, is yes (for reasons above), but it may also present the opportunity for the company to buy back its own shares.

Canbo
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    You may want to emphasise this sentiment a bit more: Trying to sell this many shares at once will likely disadvantage you (in that you'd get less money than selling it slowly). At any given point there will be, for example, 50 people willing to buy 1 share (or 1 person buying 50 or any other combination) at $9.99, 20 people at $9.50, 100 at $9, etc. (this is in the "order book"). So every share after the 50th would sell for $9.50, every one after the 70th would sell at $9, and so on. If you sell only 50 now, this would give some time for new buyers to appear at $9.99. – NotThatGuy Oct 30 '19 at 11:08
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    It's similar to being a "motivated seller" of a house -- you may be forced to accept a bid lower than the assessed value. – Barmar Oct 30 '19 at 19:40
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OP asks, if selling 3% share of a company would "harm the company."

If this is a private stock buyback by OP's company, the company is spending cash to buy OP's shares. Simultaneously, the company is increasing its own shares by an equal amount. So the company balance sheet is not harmed. Consider, however, the impact on the company's cash position. The company may need to raise 1.8 million in cash to buy OP out, if it doesn't have that cash already.

If this were a publicly traded company, given a market capitalization of approximately 60 million dollars, such a sell could be well in excess of the average daily traded volume of the stock. The broker might be unable to fill the whole sell order at the current price, all at once. The market price may decline. A declining market price does not harm the company in the long term, and in fact may represent a buying opportunity for other potential investors. The market price will eventually correct itself.

However, from OP perspective in the above scenario, reducing the market price of company shares would affect the immediate value of shares held by other company shareholders... some of which OP may care about. To avoid impacting those other shareholders, OP may consider a more gradual reduction of their shares to zero.

If this is a private transaction between OP and another private investor, then the company isn't financially risking anything and the terms of the deal are private.

Chris
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All of the other answers concentrate on the impact on the share price or company value of selling some small fraction of the company's shares. Depending on exactly how the shares are sold, and how large the market for the shares is this can vary from "none" to "non-trivial".

However the answers have all neglected the possible impact of the sale on investor sentiment. If the OP is a long-term employee or investor in the company and suddenly decides to dump his shares, other investors and potential investors might wonder "what do they know that we don't?" and the value of the shares would drop. If the OP is a senior member of the board and they sell all their shares, this is a more serious concern; if they are some junior employee who chooses to sell some small fraction of their shares, this is probably unimportant. (If this is the OP's employer, I would certainly suggest selling at least half the shares just to diversify their investments.)

The other question is "How does the OP know the shares are worth $1.8M (which implies a company valuation of $60M)?". If the shares are publicly traded, then it is easy to value the shares. On the other hand, if the company has just gone through a funding round and has got $15M funding in exchange for 25% of the equity, then that corresponds to a company valuation of $60M, but there may well be no-one interested in buying (some of) the OP's shares at that price.

Martin Bonner supports Monica
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  • This answer highlights the point that the OP might not be able to sell the share. You always need to sell the share to someone, if no one is buying it from you the valuation of the company is not relevant. – leo Nov 01 '19 at 10:11
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If you intend to sell, you should be selling this in bits and chunks if at all possible. First to avoid oversaturating the market and causing investor worries, and second, for tax reasons.

It is sub-optimal to dump the entire stake onto the marketplace in one tax year, as this will push you into the highest tax brackets. So you want to sell some this year still, and then space out further sales into next year and beyond.

Yeah, yeah, timing the market... however the fact is we have been in an economic expansion for quite a long time, and all good things come to an end. You are carrying the risk that this stock could tank before you can sell it, as many stocks did in 2007-08. Conversely you'd then have the risk that you rush to sell it and then it continues to climb, and get stuck with both the tax disadvantages of a heavy sale and also the absence of gain.

Harper - Reinstate Monica
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  • The OP should start talking to the company's head of investor relations or someone in their finance department to see what the procedure is, whether the company might buy the shares, and what secondary markets they've worked with, if any. It's also advisable to contact known secondary market brokers like EquityZen and SharesPost to see if they can facilitate a transfer. – David Schwartz Nov 02 '19 at 04:36
  • And, by the way, a company like this probably has someone designated to handle these kind of investor requests and the OP's almost certainly won't be the first. Investors want to minimize risks or reach their investment time horizons or otherwise need to convert shares to cash for all kinds of reasons. You won't offend anyone by asking what your options are and how you can work with the company to get some cash for some of your shares. – David Schwartz Nov 02 '19 at 16:50