Understanding Privately Held Stock And How It Impacts Your Portfolio
Share and Follow

There are countless privately held companies across the country who want to reward loyal employees with incentives. Employers might offer stock-based compensation or stock options in lieu of cash bonuses. This article explores privately held stock, why employees own it, and some things you should be aware of.

Privately Held Stock: What It Is, Plus Pros And Cons

A privately held stock is an ownership stake in a corporation whose shares are not available to the public.

Positives

Companies that are not publicly traded (in theory) do not have as much of a focus on short-term stock price and can take a longer view on the future of the company.

These companies have power to select their investors and advisors.

These companies could go through an initial public offering or be acquired at a premium in the future, leading to potentially significant gains by the investor.

Privately held stock may experience less price movement due to market volatility because of the lack of liquidity.

Negatives

Because shares are not available to the public, the investor would have to seek someone to buy their shares if they need liquidity.

Owning a single illiquid stock position puts disproportionate risk on the investor holding it.

Unicorns, or privately held startups that reach valuations over $1 billion, are rare. As of June 2023, there are 1,200 unicorns in the world (The number of companies in the United States is around 10.75 million, according to the 2020 census).

If companies choose their advisors or investors poorly, the company may be at significant risk.

Common Reasons Why Investors May End Up With Privately Held Stock

1. It is part of your compensation/bonuses. I’ve found this to be the most common and unavoidable way.

2. You were given stock options. This is when investors can opt to buy the stock at a fixed price for hopes they can sell it later at a higher price.

vice For Investors

For many reasons, I do not encourage investors to hold concentrated stock for their investment goals. Individual stocks run the risk of going to $0 and broadly diversified portfolios help mitigate risk and can improve your returns.

If you’re on track with all of your individual financial goals (retirement, major purchase, education, charitable giving, etc.) and have some excess funds to play with, that is generally the only time I would say it may be acceptable to take those kinds of speculative risks and sacrifice liquidity of funds held on the side.

If owning privately held stock is unavoidable and tied to compensation, I would encourage staying in the loop about upcoming liquidity events and sale opportunities and learning if there is a system in place to facilitate the sale of these securities. Due to the risks, I would generally recommend getting out of the position, when possible, to avoid excessive exposure.

If you were to seek private equities outside of your own organization, you would need to meet high minimums in liquid investible assets to invest in this category with fund managers. Privately held stock and private equities may offer an attractive investment for those who can afford to diversify and have sufficient other assets to sacrifice some liquidity, but they are not suited for every investor.

Conclusion

Privately held stock, like any individual stock, comes with inherent risk. It can be a piece of your overall portfolio but should not be relied upon entirely for short-term or long-term investment goals. Before deciding to invest in this kind of asset class, speak with a financial advisor regarding your current risk tolerance, goals and investment needs.

Share and Follow
You May Also Like

OKC Thunder’s Significant Progressions and Game-Changing Events in the 2023-24 Season

SALT LAKE CITY, UT – JULY 5: Chet Holmgren #7 of the…

Mounting Pressure Leaves Napoli’s Title Defense in Shambles

RENATO DALL’ARA STADIUM, BOLOGNA, ITALY – 2023/09/24: Khvicha Kvaratskhelia of SSC Napoli…

7 Reasons to Consider La Paz, Mexico for Your Dining Getaway

Seafood is king in various preparations along the coastal city of La…

Singaporean Billionaire Min-Liang Tan Establishes Global Presence with 100 Razer Stores, Collaborates with Luxury Powerhouses including Dolce & Gabbana

Min-Liang Tan has big plans for Razer. Photo credit: Juliana Tan for…

Why Ranking Majors is More Logical Than Ranking Colleges

Newman Vertical Campus, Baruch College, Exterior, New York City, New York, USA.…

Executives Should Take the Lead, Not HR, in Driving Change

getty Organizations are led by executives, not human resources. Culture transformation should…

Maine and Massachusetts Taxpayers Affected by Hurricane Lee Granted Extended Time by IRS

Waves crash against the rocks at Portland Head Light, Saturday, Sept. 15,…

Excitement Builds as Michael Andlauer Takes Over Ownership of Ottawa Senators

Captain Brady Tkachuk salutes the crowd at the Canadian Tire Centre after…