Can Your Investors (or Employees) Actually Sell Their Shares?
An investor sends you an email asking to sell part of their stake to a buyer you have never heard of.
A few weeks later, an early employee asks whether they can sell some shares before your next funding round.
At first, these requests may sound simple. You may think the shareholder owns the shares, so they should be free to sell them.
That is not how private company equity usually works.
A secondary sale is a securities transaction. It can involve federal resale rules, company transfer restrictions, investor rights, board approvals, and cap table updates. If the company gets involved in arranging or facilitating the transaction, its own legal exposure can also change.
Private secondary markets have grown quickly. SEC Commissioner Hester Peirce said in February 2026 that private secondary market volume increased from $162 billion in 2024 to $240 billion in 2025. Carta reported 396 tender offers in 2025, a 62% increase from the prior year. At the same time, PitchBook reported in September 2026 that recent tenders at Anthropic and OpenAI fell short as more employees chose to wait for an IPO rather than sell early.
Whether your company is seeing heavy demand for liquidity or very little interest, the legal question remains the same:
Is the transfer allowed, and does the resale comply with securities law?
Your Private Company Shares Are Restricted Until Proven Otherwise
Shares issued through a private placement generally carry resale restrictions under federal securities law.
That means a shareholder cannot simply find a buyer and transfer the shares without checking the applicable rules.
A seller generally needs an available registration exemption to resell restricted stock. Two routes that may apply are Rule 144 and Section 4(a)(7). The exact exemption depends on the facts surrounding the transaction and the seller.
Rule 144 also has different requirements depending on whether the company reports to the SEC and whether the seller is an affiliate.
An affiliate may include a director, officer, or major shareholder. Holding periods and volume limits can also affect whether a resale qualifies under Rule 144.
The important point for founders is simple: do not tell a shareholder that a proposed resale is permitted until the securities law analysis has been completed.
Your Corporate Documents May Restrict the Transfer Too
Federal securities law is only one layer.
Your company’s own governing documents may impose additional restrictions.
A certificate of incorporation, investor rights agreement, or bylaws may contain a right of first refusal. The documents may require board approval before shares can be transferred. They may also prohibit certain transfers altogether.
For example, an investor may find a private buyer who is legally able to purchase restricted stock under an available exemption. That does not necessarily mean your company has to approve the transaction.
Existing investors may have contractual rights to purchase the shares first. The board may also have an approval right.
So there are really two questions:
- Can the shareholder legally resell the securities?
- Does the company’s documentation permit this particular transfer?
You need a yes to the applicable requirements before allowing the transaction to proceed.
Company Involvement Can Create Additional Exposure
The company’s role in the transaction also matters.
There is a difference between reviewing and consenting to a shareholder transfer and actively facilitating the sale.
If the company helps organize, price, or facilitate a transaction, its obligations may increase. A formal tender offer, for example, can create disclosure obligations to participating sellers.
Informal assistance can also create problems.
Suppose management helps connect a shareholder with a buyer, discusses pricing, or provides information about the company without properly reviewing the transaction documents and applicable waivers.
If the required restrictions, legends, or disclosures are not handled correctly, the company may face exposure alongside the buyer and seller.
That is why the company should have a defined process rather than handling each request as a personal favor to an investor or employee.
Build a Process Before the Next Request
Your company should decide in advance how it will handle secondary sale requests.
A simple written policy can identify who reviews the request, what documents the seller must provide, and when the company will facilitate, consent to, or decline a transaction.
Before giving informal approval, have counsel confirm which resale exemption applies.
This is important because it is much harder to reverse an informal “yes” after a buyer and seller have started relying on it.
The process should also address the company’s internal records. Once a transfer is approved and completed, the stock ledger and cap table need to reflect the new ownership.
That gives you a repeatable process for future transactions and reduces the chance that an informal transfer becomes a problem during your next financing.
Investor Shares and Employee Equity Are Not Always the Same
Another common source of confusion is treating all equity holders alike.
An investor holding preferred stock may be subject to one set of transfer provisions. An employee holding shares or equity received through an incentive plan may face different restrictions.
Employee equity can have separate transfer rules under the company’s equity incentive plan. Those restrictions may apply even when an investor-held security is subject to different provisions under an investor agreement.
Before approving a sale, identify exactly what type of equity is being transferred and which documents govern it.
The answer should come from the company’s records, not from assumptions based on who owns the shares.
Common Founder Mistakes
- Treating an informal request as a simple approval. A founder may agree to a friendly secondary transaction without checking the restrictive legend, applicable resale exemption, or the company’s right of first refusal. The missing review may not surface until the next financing.
- Failing to update the cap table and corporate consents. A transfer may close, but the company still needs the required board consent, stock ledger update, and changes to applicable investor agreement schedules. If these records are not updated, the next financing can become slower and harder.
- Assuming employees can sell whenever they choose. Employee equity may have transfer restrictions under the company’s equity incentive plan that differ from the restrictions affecting investor-held preferred stock. Applying the same process to every holder can create avoidable legal and recordkeeping problems.
10-Minute Share Transfer Self-Check
- Do you know whether the securities being sold are restricted?
- Has someone confirmed the registration exemption that applies to the proposed resale?
- Do your certificate of incorporation or investor agreements give the company or other shareholders a right of first refusal?
- Will the company facilitate the sale or simply provide its consent?
- Are the stock ledger and cap table ready to record the ownership change?
- Have you separately reviewed the rules for investor-held equity and employee-held equity?
If you cannot answer yes to all questions, you are not ready to approve the transfer.
Bottom Line
Secondary sales are becoming a normal part of private company ownership.
Investors may want liquidity before an exit. Employees may also want to sell some of their equity before an IPO or acquisition.
That does not make every proposed transfer routine.
A proper review needs to address securities law, company transfer restrictions, investor rights, board approvals, and ownership records. The company’s role in the transaction also needs careful attention.
Treating a secondary sale as a quick favor can leave you with an inaccurate cap table or a diligence problem at the next financing.
A simple approval process gives you a much better way to handle these requests.
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