Creating a market for shares in a private company
Produced in partnership with Sarah Anderson of RM2 Partnership
Creating a market for shares in a private company

The following Share Incentives guidance note Produced in partnership with Sarah Anderson of RM2 Partnership provides comprehensive and up to date legal information covering:

  • Creating a market for shares in a private company
  • Employee Benefit Trust (EBT)
  • Purchase by third party shareholder
  • Put and call options
  • Readily Convertible Assets (RCAs)
  • Valuation of private company shares

Private companies that implement share option schemes will often make use of 'exit-only' options, meaning that share options can only be exercised by participants when (and in practice, immediately before) the company is acquired by a third party (or its shares are listed on the open market by way of flotation). Such an exit provides an immediate market for the shares acquired by participants and typically, on a sale of the company, the shares will be sold by participants alongside the existing shareholders.

However, it is not uncommon for private companies to put in place share options that become exercisable outside such exit events. For example, participants may be permitted to exercise their options and acquire shares after the elapse of a certain time period, or on the achievement of certain performance conditions.

In some cases, the direct ownership of shares—together with the potential to receive dividends on shares—may be sufficient reward for the participants. However:

  1. additional value can be provided by creating an internal market allowing employee shareholders to buy and sell their shares. (This is in addition to the usual requirement for leavers to sell shares back to the company on cessation of employment, a provision which should usually be included in a private company’s articles where a share scheme is put in place), and

  2. an internal market would provide an