Starting a Small Business/company shares
Hello, David K. Staub
I recently started working for a start-up company as a web developer.
Since it is a start-up the pay is not that great, but I was given company shares as 'payment'.
I do not have a business degree nor knowledge of shares/stocks.
So, what exactly can I do with these shares?
How can I generate wealth with the shares?
Unfortunately, there is no simple answer to your question. There are several factors that have it an effect on whether or how you can realize value from your shares.
First, are there any contractual restrictions on the transfer of the shares? Often when shares are issued to employees in a startup business, the company places restrictions on the shares that may prevent or at least hinder you from selling those shares. Those restrictions take various forms, but often the employee is required to offer the shares back to the company at a fixed or heavily discounted price. If that is the case in your situation, you should have been told that at the time the shares were issued to you.
Second, the transfer of the shares may be restricted by federal or state securities laws. In a startup, the shares are almost never registered with the Securities and Exchange Commission but rather are issued using an exemption from registration under state and federal securities laws. The employee, in turn, can only sell the shares if there is an available exemption to him under state and federal securities laws. It is usually not difficult for an employee who is selling relatively few shares to find an appropriate exemption, but it is still a hurdle that must be cleared.
Even if there are no contractual restrictions on transfer, and the sale qualifies as exempt from registration under state and federal securities laws, there is often no market for the shares of a privately held company. The shares are only worth what somebody would be willing to pay you for them. If the company is paying dividends, has a reasonable prospect to go public in the near future or is a likely candidate to be sold, then there may be buyers willing to pay a reasonable price for the shares. If one of those factors is not present, then a buyer, if one exists, would likely expect to pay a steeply discounted price for the shares.
Now that I have told you about the problems in realizing any value for your shares, let me explain how you can get value. Most startups which hand out stock to employees are doing so in the expectation that there will be an event which will enable the founders and their employees/shareholders to cash out. The two most frequent ways to do that are to sell the company or to "go public."
Your shares represent a percentage of the ownership of the company. If the company sells its assets, you will receive your proportionate share of the sales price. If the company arranges for its shareholders to sell their shares, you will receive the proceeds of the sale of your shares. If the company goes public, you will not generally be able to immediately sell your shares but the act of going public creates a market for your shares which did not previously exist. After a short waiting period, you would typically be able to sell all or a portion of your shares on the open market.
The key to all this is that the company must be increasingly successful. If the company fails or even flounders about, the company is not increasing in value and neither are the shares that represent your percentage ownership of the company.
I hope this answers your question.