In a paper titled "Cashing it In: Private-Company Exchanges and Employee Stock Sales Prior to IPO," authors David F. Larcker, Brian Tayan, and Edward Watts review the practices of 34 tech and services-related companies as well as data from private secondary markets.
Of the 34 companies, slightly over half allow employees to sell or pledge a portion of their vested equity awards. Of those allowing sales, two-thirds allow sales back to the company, 40 percent allow sales on a private secondary market, 47 percent allow sales to third parties outside of a private secondary market, and 7 percent allow shares to be pledged as collateral for a loan. Practice regarding when sales are allowed varies widely, with 41 percent allowing sales during continued employment, 53 percent allowing sales at or around departure from the company, and 77 percent allowing employees to sell following departure. The authors also studied data from private secondary markets. The majority of the sellers on such markets are individuals, while there are more institutional purchasers. Prices tend to be volatile. Buyers also appear to exact discounts. Based on a subsample of companies that went public one year following the secondary market sale, the average seller sold at a 39 percent discount to the subsequent IPO price. Given that little information is available about these transactions and the trends among private companies, the paper provides useful insights.
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