finding a buyer for private equity - avoiding commissions

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moral_hazard
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finding a buyer for private equity - avoiding commissions

Post by moral_hazard »

Howdy!

I've posted about this subject before, I'm trying to begin my path towards getting liquidity on a large private equity investment that I'm holding. This investment makes up about 90% of my net worth. I'd like to sell about 20% of it this year, and then rest of it I will continue selling off in chunks every 6mo-1 year, or sell the entire lot wholesale if the company chooses to IPO. Right now, all of my options are brokers or liquidity firms who are offering decent prices but a 5% commission fee . My question, being someone that despises fees and commissions, is whether it would be worth my time to try to find a buyer who I can sell to directly, commission free. I worked extremely hard to earn and purchase this equity, so the idea of giving 5% away is a little disappointing. The company is particularly hot right now, I'm sure someone is out there, but I don't really know how to go about finding them (perhaps make a website where people can contact me, or post an ad?). That said, I'm also just happy to be up so much on this investment, and thinking about taking the easy way out and just paying the 5% fee since I value liquidity and safety at this point given how much the investment has grown and the risk it poses to my otherwise diverse portfolio. What would you all do in this situation?

EDIT: I do have interest from someone in the family on buying this, but I might avoid that option. I would be really bummed if I sold them a large position in this company and then it fell drastically, which is certainly a possibility.
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White Coat Investor
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Re: finding a buyer for private equity - avoiding commission

Post by White Coat Investor »

90% of portfolio? I'd be trying hard to sell on my own and gladly paying 5% to anyone who can help me. Heck, I'm paying 6% to sell a property right now.
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moral_hazard
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Re: finding a buyer for private equity - avoiding commission

Post by moral_hazard »

EmergDoc wrote:90% of portfolio? I'd be trying hard to sell on my own and gladly paying 5% to anyone who can help me. Heck, I'm paying 6% to sell a property right now.
Yes, I graduated college a couple of years ago, joined a hot tech company, and exercised my options early via stock purchases when the price was still low and 83(b) elections in order to minimize AMT and capital gains taxes. The investment has grown basically in accordance with my best estimate of what might have happened, which is how it ended up being such a huge portion and also why I am looking to begin selling it off.
Topic Author
moral_hazard
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Re: finding a buyer for private equity - avoiding commission

Post by moral_hazard »

EmergDoc wrote:I'd be trying hard to sell on my own
I guess my question is, how can I do this? It seems tricky to find people who are interested in this company. I also don't want to attract too much attention as the company is very private about these things.
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ResearchMed
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Re: finding a buyer for private equity - avoiding commission

Post by ResearchMed »

moral_hazard wrote:
EmergDoc wrote:90% of portfolio? I'd be trying hard to sell on my own and gladly paying 5% to anyone who can help me. Heck, I'm paying 6% to sell a property right now.
Yes, I graduated college a couple of years ago, joined a hot tech company, and exercised my options early via stock purchases when the price was still low and 83(b) elections in order to minimize AMT and capital gains taxes. The investment has grown basically in accordance with my best estimate of what might have happened, which is how it ended up being such a huge portion and also why I am looking to begin selling it off.
If this "hot tech company" has performed to your *best* expectations, and now comprises 90% of your assets, then if it were me, I'd take the money (minus the 5%) and run, skipping along with a nice big smile :D

Or at least, say, half or more, which is mostly profit, right? And maybe then let some of it ride if you must?

Why risk a downturn, which could be far more than 5%?

RM
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ourbrooks
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Re: finding a buyer for private equity - avoiding commission

Post by ourbrooks »

I'm sure someone is out there, but I don't really know how to go about finding them (perhaps make a website where people can contact me, or post an ad?)
guess my question is, how can I do this? It seems tricky to find people who are interested in this company. I also don't want to attract too much attention as the company is very private about these things.
Do you believe in paying doctors? They don't really do much, just look at you and write prescriptions. All you're really paying for is their knowledge and skill. I'm not sure why it's really so different to pay a broker who does know how to go about finding someone who is out there. Unlike the doctor, the broker only gets paid if they find someone and they get paid more, the more you get paid.
Gropes & Ray
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Re: finding a buyer for private equity - avoiding commission

Post by Gropes & Ray »

I would say the investment is worth much more with a broker than without. Find a good lawyer too. Your broker can probably help with that.
Topic Author
moral_hazard
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Re: finding a buyer for private equity - avoiding commission

Post by moral_hazard »

ourbrooks wrote:
I'm sure someone is out there, but I don't really know how to go about finding them (perhaps make a website where people can contact me, or post an ad?)
guess my question is, how can I do this? It seems tricky to find people who are interested in this company. I also don't want to attract too much attention as the company is very private about these things.
Do you believe in paying doctors? They don't really do much, just look at you and write prescriptions. All you're really paying for is their knowledge and skill. I'm not sure why it's really so different to pay a broker who does know how to go about finding someone who is out there. Unlike the doctor, the broker only gets paid if they find someone and they get paid more, the more you get paid.
i guess my overall disappointment is just how many people get to eat into my hard earned equity. fed will take their 15%, CA will take their 9.30%, broker takes his 5%...net to me is only 70% of what I earned, which is kinda sad. of course, agreed with all of you that I am very lucky to be in this situation having made such a risky investment. I think I'll go with the broker, putting in more of my free time into this is probably not worth the marginal return of possibly avoiding the 5% hit at this point. I already spent hours on the phone trying to find the brokers/services who offer the best prices, and dealing with a private buyer independently is risky because apparently they often walk at the last minute. will go with whichever broker comes out on top with the best total amount for me. thanks!
Tanelorn
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Re: finding a buyer for private equity - avoiding commission

Post by Tanelorn »

If it's a big enough amount of dollars, maybe you could get a private equity or venture capital firm interested? You can find them without a broker.
FredL
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Re: finding a buyer for private equity - avoiding commission

Post by FredL »

Every business has to have reason to exist. Broker charges you commission because it has overhead and wants to make decent profit. Broker has connection, knows the right market value, you don't. You may think you know the market value, but it may be too high or too low. If you want to sell your equity yourself, you need to spent money to advertise often with many different media. You also need to talk, negotiate and check the credential to and of each every interested buyer. Every home seller think if he or she sells his or her own home can make more money without agent, but that is not necessarily true. I don't know if you have heard this story. Many years ago two NBA big stars Magic Johnson and Larry Bird came out. Larry Bird has an agent and Magic Johnson didn't want any agent. He negotiated his salary himself. He thought this way could make more money. It turned out Larry Bird's salary was much higher than Magic Johnson's. The percentage of the commission you may be able to negotiate it down and the term is not exclusive. If you don't have time table, you may try it yourself, but you have to understand it is possible you may have spend money without making sells.
adamthesmythe
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Re: finding a buyer for private equity - avoiding commission

Post by adamthesmythe »

> It seems tricky to find people who are interested in this company.

I guess that's why brokers want 5% for their efforts.
robert88
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Re: finding a buyer for private equity - avoiding commission

Post by robert88 »

Is there a right of first refusal clause? You, or better yet, a lawyer need to look over the contract before you sell.
Topic Author
moral_hazard
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Re: finding a buyer for private equity - avoiding commission

Post by moral_hazard »

robert88 wrote:Is there a right of first refusal clause? You, or better yet, a lawyer need to look over the contract before you sell.
yep. i suppose with a private deal there has to be some sort of incentive in place in case they ROFR.
itstoomuch
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Re: finding a buyer for private equity - avoiding commission

Post by itstoomuch »

The Buyer has more risks than you the Seller has. :annoyed
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Valuethinker
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Re: finding a buyer for private equity - avoiding commission

Post by Valuethinker »

moral_hazard wrote:Howdy!

I've posted about this subject before, I'm trying to begin my path towards getting liquidity on a large private equity investment that I'm holding. This investment makes up about 90% of my net worth. I'd like to sell about 20% of it this year, and then rest of it I will continue selling off in chunks every 6mo-1 year, or sell the entire lot wholesale if the company chooses to IPO. Right now, all of my options are brokers or liquidity firms who are offering decent prices but a 5% commission fee . My question, being someone that despises fees and commissions, is whether it would be worth my time to try to find a buyer who I can sell to directly, commission free. I worked extremely hard to earn and purchase this equity, so the idea of giving 5% away is a little disappointing. The company is particularly hot right now, I'm sure someone is out there, but I don't really know how to go about finding them (perhaps make a website where people can contact me, or post an ad?). That said, I'm also just happy to be up so much on this investment, and thinking about taking the easy way out and just paying the 5% fee since I value liquidity and safety at this point given how much the investment has grown and the risk it poses to my otherwise diverse portfolio. What would you all do in this situation?

EDIT: I do have interest from someone in the family on buying this, but I might avoid that option. I would be really bummed if I sold them a large position in this company and then it fell drastically, which is certainly a possibility.
Dont' focus on the 5%, focus on the 90% (or the 70% after everything).

Get money off the table.

This boom won't last forever. Been there, done that, got the t shirt. I'd be a million pounds or so richer if I'd understood that better.

5% is just a cost of doing business. In a corrupt country, you'd pay 20%.
CFOKevin
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Re: finding a buyer for private equity - avoiding commission

Post by CFOKevin »

I have never seen an intermediary help achieve a sale at a good price in a privately held company. Their buyers are usually looking for a deal and the due diligence required is a pain. Here's what I recommend:

First, know your Shareholders Agreement. Typically, there are provisions for a private sale that you will have to follow. Most likely, you will need to give the Company a chance to buy on the terms that you negotiate with a private buyer.

Second, try to find out as much as possible about the cap table. Who else holds shares? A current shareholder is your most likely buyer and they will be easiest to deal with since they know the company and (presumably) like it. Members of management, venture capitalists, pe investors, etc. make for good buyers.

Third, consider reaching out to the CFO at the company and explain what you are looking to do and your motivation. The CFO may be able to advise about other recent sales and who was easiest to deal with, administratively. Your desire to diversify is very understandable at this stage of a Company's growth.

Last, hold on to at least a small amount of the shares so you can see where it ends up.
DFAMAN
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Re: finding a buyer for private equity - avoiding commission

Post by DFAMAN »

Good advice from CFOKevin. I would be very surprised if the stockholders agreement (or possibly the charter or bylaws) allows unfettered ability to sell. You probably have some hoops to jump through, particularly if you are proposing to sell to a person who is not a current stockholder. If the company has a general counsel, he/she should be able to educate you on the requirements for a sale. If no general counsel, the CFO is your next bet.
Topic Author
moral_hazard
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Re: finding a buyer for private equity - avoiding commission

Post by moral_hazard »

Just to update -- I shopped around quite a bit and came out with an offer that was about 4-10% above all of the others. Going to move forward with my first sale assuming the terms of the deal stick, and will be liquidating 22-25% of my current holdings. Thanks all :)
Tanelorn
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Re: finding a buyer for private equity - avoiding commission

Post by Tanelorn »

Great advice, CFOKevin.

Moralhazard - glad you found a buyer at a good price. Did you end up paying a commission, or did you avoid it by finding someone directly?
Topic Author
moral_hazard
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Re: finding a buyer for private equity - avoiding commission

Post by moral_hazard »

Tanelorn wrote:Great advice, CFOKevin.

Moralhazard - glad you found a buyer at a good price. Did you end up paying a commission, or did you avoid it by finding someone directly?
Got a call this week and the deal fell through :( It was supposed to entail a 5% commission. The broker is going to start looking for a new buyer. I have another potential buyer that might work out as well.
skjoldur
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Re: finding a buyer for private equity - avoiding commission

Post by skjoldur »

moral_hazard wrote:
ourbrooks wrote: i guess my overall disappointment is just how many people get to eat into my hard earned equity. fed will take their 15%, CA will take their 9.30%, broker takes his 5%...net to me is only 70% of what I earned, which is kinda sad.
Over a $413,200 of cap gains (in 2015) the fed will take 20% + 3.8% for incomes over $200k.

I recommend that you build the taxes and fees/commissions into the spreadsheet you use to estimate the value of your holdings and only look at the 'money in your pocket' result, not at the original amount.

Also, you might feel a bit better about the people 'eating into your equity' if you contemplate the degree to which those 'people' fostered the conditions which enabled the creation of this wealth. The infrastructure, employee educations, legal system and environment that enforces contracts, low corruption due to confidence in institutions, etc. etc.

I've been through a vaguely similar situation (FWIW I bet you can negotiate all of the terms that the brokers suggest in their agreements) and, sure I wish I could have kept all 'my' hard earned money--but on the other hand I could also have tried to earn a tech windfall in Bolivia or the the Sudan where maybe it's not so easy to start a business, hire world-class engineers, avoid shakedowns by government officials, and have contracts enforced--30% seems like a pretty good deal to have all of that covered.

I would echo the advice here, find a broker (interview a variety of them, find one you like, and negotiate his or her terms to the extent possible). Focus on the resulting money rather than on the imagined value pre-tax, pre-commission, etc.

Also, yeah, I agree selling to friends or family seems a bit scary in this case, I would avoid it in general unless the person was really experienced and had a track record of similar investments (including losses).

Good luck, and enjoy the totally awesome giant portion of your hard earned fortune.
mac808
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Re: finding a buyer for private equity - avoiding commission

Post by mac808 »

PM me if you are interested and I can take a look at the details. I lead a small group that does secondary market transactions (fb, twitter pre-ipo, now pinterest, palantir, etc). The hardest part is establishing valuation since common stock is rarely bought or sold.
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