Private equity stock is awarded to upper-level management, owners and creative talent in private companies. Typically, private equity stock comes as part of a benefits package, or as special compensation for particularly important work. Employees work for a company for a period of time, called a vesting period, before earning private equity stock; this period usually lasts between five and seven years. Once an employee earns equity in a private firm, she can borrow against it or use it as collateral for a bank loan, though some restrictions limit the ability for private equity shares to secure a loan.
Check your vesting status and the value of any private equity you have in the company for which you work. Benefits like private equity stock are divided into two categories: "cliff" vesting and "step" vesting, according to the Taiping Pension Company. "Cliff" vesting means you get access to all of your benefits and private equity stock after a set period of time; "step" vesting means you gain access to benefits and equity gradually over several years.
Ensure your company doesn't reserve the right of first refusal on your private equity stock. Accredited investors — those whose net worth is over $1 million or whose annual salary is between $250,000 and $300,000, according to the Securities and Exchange Commission (SEC) — trade private company equity on capital markets like SharesPost and SecondMarket; firms can prevent their stock from entering such markets by reserving the right to buy the private equity from the employee, should he decide to sell. Your employment and benefits contract might have a similar clause governing the use of private equity as collateral.
Compare the number of private equity shares you have with the total number of shares the company has issued; the value of private equity shares depends upon the percentage of the company it entitles you to own once the company makes an initial public offering (IPO). If you acquired the private equity on a capital market, the value of the shares is the current trading price for the shares. Private equity markets are not very liquid, which means the price of private equity is not likely to change.
Determine the value of your private equity. The International Private Equity Valuation (IPEV) Board identifies six methods of determining the fair value of private equity, such as considering the firm's net assets, discounted cash flow and earnings, the price of recent investments and any performance evaluations unique to to the industry. With the fair market value of your firm established, determine the percentage of that value to which your shares of equity entitle you.
Approach a bank or financial institution to open a loan or line of credit which will be secured by your private equity. Do not approach a lender without confirming the fair market value of your private equity, and then ensuring you can legally use it as collateral. Should you fail to make loan payments or default on your loan obligation, your lender can make a legal claim to your private equity, which could result in a lawsuit or other action if you are not legally allowed to secure financing with your private equity.
1Though it is unlikely that the value of private equity will fluctuate, consider borrowing less than the value of your equity, in case its fair market value drops.
- Securities and Exchange Commission: Accredited Investors
- Securities and Exchange Commission. "Excerpts From Information Memorandum." Accessed August 17, 2020.
- Harvard Business School. "Private Equity and Financial Fragility during the Crisis," Page 2. Accessed August 17, 2020.
- Preqin. "The Future of Alternatives," Page 12. Accessed August 17, 2020.
Ben Taylor has been writing since 2005 and has had work published by WEKU-FM and West Virginia Public Broadcasting both on air and online. Taylor holds a Master of Arts in English from Eastern Kentucky University and currently teaches composition and ESL there.