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Question
Hello, Steven

I've been working at a company for close to 1 year.

The company is a startup, so the payment is low. However, we get shares on top of our base salary as additional forms of payment.

What can I do with my share certificates?

Can I 'redeem' those shares for cash at any time?

What advice would you give to a shareholder of a startup company? ( your best possible tips ).


Thanks


PS: I come from an IT ( information technology ) background and have little knowledge of business. As an attempt to understand my situation as a shareholder, I had a conversation with the CEO and he mentioned that he was not interested in making the company a public one ( I couldn't understand very well his explanation, but to me it sounded as if publicly traded companies were riskier ). How would a non-public company affect in the value of shares?

Answer
Jake, you have some very good questions.

There really is very very little you can do with your shares. Private companies are very illiquid, and there is no active market for the shares. In the US, there have been proposals to start private exchanges among institutional investors to allow shareholders of pre-public private companies to sell shares to accredited investors, but that does not apply in your case, especially as there is no plan to take the company public. Going public has many benefits, including helping companies more easily raise capital, but it also allows for a benchmark valuation of a company's worth as well as allowing shareholders, like yourself, an exit strategy and a way to sell the shares you received as part of your compensation. Right now, you are locked in and have to hold your shares.

If the company has no plans to go public, not only are your current options very limited, but your future ones as well. As some point the CEO or large investors may decide to institute a plan to buy the shares from employees privately. However, not only is there no guarantee that will happen, but how will you know what your shares are worth and if what they may offer is a fair deal? Because of the benefits of being public, public companies trade for substantially higher valuations than private ones.

Working for a startup is not for everyone. As you said, the pay for startups tends to be lower than other more established companies, because they often provide them with stock or options. If the company is successful and goes public, the payoff can be enormous. It is really a case of exchanging current returns for the potential of much higher returns in the future. In a way, it is gambling on a future payoff at relatively long odds, as most startups ultimately fail. My best possible tip for working for a startup is to ask yourself if you are willing to make that sacrifice. Not everyone is - many people would rather take more money upfront and the security that comes with a more established company than the world of startups.

Since your company has no plans to go public, what you are really gambling on is that the company at some point will be acquired, and the acquiring company will buy your shares. But, as I said above, private company valuations are much lower than public ones, so under such a scenario, your payoff might not be as lucrative than if the company went public. I would suggest that you investigate the situation in more detail. If you have an employment contract, check the language and see if it details what happens to your stock if you leave the company, both voluntarily and involuntarily as that can have an important effect on your future. It is not unheard of that if you leave the company, they have the right to buy back your shares for nominal value. Hopefully that is not the case here and your stock will have value.  

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Steven Taylor

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