Frequently Asked Questions About Stock Compensation in Private Companies

In today’s tough job market, companies are constantly looking for new ways to attract and retain top talent. One such way is offering company shares as part of worker pay. But what happens when the company is private and is not on the stock exchange?

Whether you’re a worker considering a job offer or an employer wanting to boost your pay plan, knowing how stock options in private companies work can help you make informed choices about your pay package.

Can private companies offer shares as compensation?

Yes, businesses can offer shares as pay even if not listed on a stock exchange. This is common in private companies and startups. Methods include stock options, restricted stock units (RSUs) and direct stock grants.

How do these stocks work if the company is private?

In private companies, experts value shares through outside reviews such as 409A valuations. Workers can use stock options, get RSUs when they meet specific goals or receive direct stock grants. However, selling these shares can be challenging without a public market.

Does this mean these shares are worthless if not sold until IPO or acquisition?

Private company shares can still be quite valuable. They offer the chance for high returns if the company grows, give workers more drive-through ownership stakes and provide tax benefits. While it’s harder to sell them, the possible rewards can be considerable.

How will employees benefit if the company never goes public?

Workers can gain through private trading markets, company buybacks, profit shares, being bought by other firms and in-house markets. These choices allow employees to monetize the shares even if the company stays private.

Aren’t private secondary markets unregulated?

Private trading markets must follow federal securities laws and state rules. People must register trades with the SEC or qualify for exceptional cases, and sites that help with these trades must comply with these rules.

Understanding the value of private company shares

Knowing these points helps you understand the value of private company shares and their possible benefits as part of a compensation package. This knowledge can help you make smart choices about stock options in private companies.

If you have any questions about employment law or executive/employee compensation, our firm can help. Contact us for a consultation.