What if the private company simply refuses to allow you to sell your shares?

CreditCardChris

Some companies just never go public, no matter how large they get. So what happens if you invested in a private company and you hold some shares but the company flat out refuses to allow anyone to sell.

I know there are websites that let you sell private shares but this is only possible with the permission of the directors of the company right? Have any of you ever invested in a private company and been refused permission to sell, either back to the company or to an outside buyer?

Notepad_Phil

I thought that private companies weren't really meant to sell shares to the general public, so how did you come to get involved? Are you sure that they are not some kind of scam.

Personally I'd never invest in any company without there being a clear path to selling out my investment, even if I knew the people involved in the company well, but possibly take a look at https://www.lawdonut.co.uk/business/business-ownership-and-management/shares-and-shareholders/issuing-and-transferring-private-company-shares-faqs to get some ideas on possible next steps if this is a real company.

CreditCardChris

Notepad_Phil wrote: »

I thought that private companies weren't really meant to sell shares to the general public, so how did you come to get involved? Are you sure that they are not some kind of scam.

Personally I'd never invest in any company without there being a clear path to selling out my investment, even if I knew the people involved in the company well, but possibly take a look at https://www.lawdonut.co.uk/business/business-ownership-and-management/shares-and-shareholders/issuing-and-transferring-private-company-shares-faqs to get some ideas on possible next steps if this is a real company.

You can invest in private companies which hold public investment, crowdcube for example. Then there are websites which allow you to buy and sell these shares should you wish, and if you get permission from the company who issued the shares.

bowlhead99

CreditCardChris wrote: »

Some companies just never go public, no matter how large they get. So what happens if you invested in a private company and you hold some shares but the company flat out refuses to allow anyone to sell.

If you don't sell, you would continue to be a shareholder in the business and be entitled to the risks and rewards, rights and benefits of the type of shares you own. If you own a very small minority share you will have little to no practical control over the operations of the business or its management and may get very limited information.

Unless stated in the company's Articles, or in a separate shareholders' agreement which you entered into, you will generally not be prohibited from transferring your shares to someone else. Of course, if there is no public market for the shares and the company is unwilling to release any sensitive/ private information about its activities, you would probably find it difficult to offload a small stake in the business for any real money - because the person buying from you would be unlikely to be able to do any insightful commercial due diligence on the opportunity you're offering them. So you would not be able to get the fair, arms-length price that someone might pay when armed with all the facts.

I know there are websites that let you sell private shares but this is only possible with the permission of the directors of the company right?

Standard Articles of Association do not usually give directors power to veto the transmission or exchange of shares between holders. Of course, the Articles can say whatever the founders (or a sufficient majority to make changes) want.

Have any of you ever invested in a private company and been refused permission to sell, either back to the company or to an outside buyer?

When I owned shares in a previous employer (a private business) I had entered into a shareholders' agreement which prohibited me from transferring shares to others without permission (other than family members or in certain other circumstances, where permission to transfer would not be unreasonably withheld). The agreements had standard drag-along / tag-along clauses so that you would not get left behind if the majority of investors agreed an exit or sale of their stake and likewise you could not disrupt the exit by refusing to sell your small minority stake. But such agreements are things you sign up to (either by entering into an explicit agreement, or by acquiring shares in a company that already outlines such terms in its Articles), so you would already know about them.

CreditCardChris wrote: »

You can invest in private companies which hold public investment, crowdcube for example.

Your terminology seems a bit screwed up. You are not thinking of private companies which 'hold' public investments (i.e. a private company which chooses to hold investments in listed companies such as Tesco or Microsoft), but private companies which take equity investments from a broad pool of private investors who have signed up with places like Crowdcube to get access to pitches offered by the private companies to the private investors who think they are qualified to receive such promotions.

Then there are websites which allow you to buy and sell these shares should you wish, and if you get permission from the company who issued the shares.

On such websites it will be pretty impossible to determine a 'fair value' for the shares you hold or that you wish to purchase, due to very limited trading volumes, and lack of information from the company itself to understand its business performance or prospects. The latter is quite reasonable - as it's a private business which does not want to give information that could be used against it by competitors or any unduly negative information that could cause it to lose the support of its existing investors

CreditCardChris

bowlhead99 wrote: »

If you don't sell, you would continue to be a shareholder in the business and be entitled to the risks and rewards, rights and benefits of the type of shares you own. If you own a very small minority share you will have little to no practical control over the operations of the business or its management and may get very limited information.

Unless stated in the company's Articles, or in a separate shareholders' agreement which you entered into, you will generally not be prohibited from transferring your shares to someone else. Of course, if there is no public market for the shares and the company is unwilling to release any sensitive/ private information about its activities, you would probably find it difficult to offload a small stake in the business for any real money - because the person buying from you would be unlikely to be able to do any insightful commercial due diligence on the opportunity you're offering them. So you would not be able to get the fair, arms-length price that someone might pay when armed with all the facts.

Standard Articles of Association do not usually give directors power to veto the transmission or exchange of shares between holders. Of course, the Articles can say whatever the founders (or a sufficient majority to make changes) want.

When I owned shares in a previous employer (a private business) I had entered into a shareholders' agreement which prohibited me from transferring shares to others without permission (other than family members or in certain other circumstances, where permission to transfer would not be unreasonably withheld). The agreements had standard drag-along / tag-along clauses so that you would not get left behind if the majority of investors agreed an exit or sale of their stake and likewise you could not disrupt the exit by refusing to sell your small minority stake. But such agreements are things you sign up to (either by entering into an explicit agreement, or by acquiring shares in a company that already outlines such terms in its Articles), so you would already know about them.
Your terminology seems a bit screwed up. You are not thinking of private companies which 'hold' public investments (i.e. a private company which chooses to hold investments in listed companies such as Tesco or Microsoft), but private companies which take equity investments from a broad pool of private investors who have signed up with places like Crowdcube to get access to pitches offered by the private companies to the private investors who think they are qualified to receive such promotions.

On such websites it will be pretty impossible to determine a 'fair value' for the shares you hold or that you wish to purchase, due to very limited trading volumes, and lack of information from the company itself to understand its business performance or prospects. The latter is quite reasonable - as it's a private business which does not want to give information that could be used against it by competitors or any unduly negative information that could cause it to lose the support of its existing investors

Thanks for taking the time to reply in detail. So if this is the case, why are so many random people investing in private companies. For example carwow recently held a fundraising round and raised £5million from 8000 investors for 2.7% equity which values the company at ~£180million.

Do the understand that there's a chance they'll never be able to sell on their shares? In reality how likely would it be that the company itself would be willing to buy back your shares?

bowlhead99

CreditCardChris wrote: »

Thanks for taking the time to reply in detail. So if this is the case, why are so many random people investing in private companies. For example carwow recently held a fundraising round and raised £5million from 8000 investors for 2.7% equity which values the company at ~£180million.

Do the understand that there's a chance they'll never be able to sell on their shares? In reality how likely would it be that the company itself would be willing to buy back your shares?

They are gambling that the company will one day be IPO'd or sold in its entirety to a third party for more than £180m, at which point they will receive some multiple of their £500 or whatever token amount of money they gambled.

There is of course also a risk that the company will be worth nothing (which happens most of the time to small private companies - more fail than succeed) or that it will eventually be sold out to a buyer at a value much lower than £180m (not unusual either) and they will lose their bet. And below a certain value the institutional investors / venture capitalists would walk away with a much bigger proportion of the company than the Crowdfunders, because they have negotiated better downside protection in the terms of their shares. But hey, if a crowdfunder invests a minimum of £250, they get a free t-shirt and some sunglasses advertising carwow, which won't be taken away from them even if the company fails.

They may be comforted that Daimler put in £25m this year which helped to value the business. Of course, to Daimler, losing £25m is less of dent in Daimler's wealth than losing £500 would be to Joe Sixpack browsing Crowdcube after a few beers, and Daimler as a pre-existing investor will likely get preference shares with better rights.

Alternatively they could have put some money on Liverpool or Man City winning the league (reasonable chance of it coming off, low potential return, chance of 100% loss) or Sheffield winning the league (very unlikely to come off, higher return if it does, chance of 100% loss).

With some small start-ups the private investors get EIS or SEIS relief - government-supported, HMRC backed schemes which offer tax reliefs to incentivise private investment in early-stage companies. That can go some way to making a viable investment slightly more viable, or tip it from uninvestible to investible, by improving your potential return / reducing the amount of pounds you could lose (even though you could still lose 100% of the net cost of your investment). Carwow's 2019 fundraise was an example of a company too far down the line in terms of size, age, or funds already raised to be able to qualify for those reliefs.

You can tell that huge numbers of people do not understand the implications of investing in private businesses because on the pitch page of crowdfund websites like Crowdcube, you get plenty of muppets saying 'can you tell me how much it is per share and how much should I be able to sell it for' or 'say if I invest £10-15, what return on investment will I make, or 'how can I track the company's value over time' etc etc.

You get people investing from foreign countries who can barely form their questions in cohesive english let alone comprehend the company's constitutional documents. They just hear it is a successful growing tech company in some industry they feel they know about (car sales - they once bought a car) and they have more money than they know what to do with in their own country. So they will invest £5000 at a valuation of 10x annual revenue and infinity times annual profit in the hope that eventually the company's revenue and profits increase, allowing them to exit at a more sane multiple in an IPO or trade sale - or that revenue growth or market share will continue and some other sucker will want to buy out all the shareholders at an even higher multiple.

Sometimes it will work out. Other times it won't. Mostly, it won't.

I invested in Justpark a year or two back, and they were back fundraising at a higher valuation not long ago. I added a small top-up investment and got fewer shares than I'd got the first time around because the valuation was £80m instead of £30m this time. Even though the shares had on paper increased in value by the time of this funding round, to be more valuable than when I had first bought, there was no opportunity to exit because that wouldn't actually raise new money for the company, only raise money for owners - and the purpose of the fundraising is to get more new money into the company to bankroll its operations and expansion; facilitating an early exit for existing owners would hinder that. The shares qualified for EIS relief (I rarely invest if they don't) but 100% loss of the net cost (or even the gross cost) of investing is still possible.

Albermarle

Do the understand that there's a chance they'll never be able to sell on their shares? I

There are plenty of warnings on Crowdcube etc that selling the shares can be difficult .
Most likely that inexperienced investors following a tip from mate down the pub, just do not read/comprehend them, and think it is only £250 anyway, and it might be the next Facebook .
As Bowlhead said , it is just a gamble in most cases .