Does cashing a 3% share harm the company itself?

Question

So I have a 3% share of a tech company and saw my $20,000 become $1.8 million. I'm not planning on cashing it now, but maybe in the future. I was wondering if selling it would harm the company that it would be bad to sell it for my personal needs.

I invested $20,000 into the company, the company is now worth about $60 million. Shares aren't publicly traded. So I guess that means my initial investment is worth about $1.8 million? Sorry I'm just calculating based on the math I know. I'm planning on selling it after a 10-20 years. I'm not even sure about anything right now, I just am curious about what happens to the investment I made.

Answer 1

You're selling the shares to someone else (in exchange for cash), not exchanging the shares for company cash.

Thus, the only way this could harm the company is by selling to someone who wants to take over the company (fine as far as it goes) but would poorly run the company.

Answer 2

It depends on how the shares are sold.

Let's say the share price right now is $10, exactly. Shares sold for $10.01 do not sell and shares sold at $9.99 are a loss to the seller.

Chances are you won't be able to sell all shares at $10/share because there won't be that many buyers looking to purchase that many shares. So you decide to sell these shares at $9.50/share to cash out, despite taking a loss.

This does at least three things:

• Saturates the market of that company's purchasable shares
• Lowers the average sale price of each share
• May be perceived (by potential buyers) as a loss of confidence of a major investor

This does decrease the average price of each share (now shareholders and the company may only be able to sell their shares at $9.75) due to a lower average purchase price and a saturated market for this company's shares.

If this would "harm" the company is situational. The answer, almost always, is yes (for reasons above), but it may also present the opportunity for the company to buy back its own shares.

Answer 3

OP asks, if selling 3% share of a company would "harm the company."

If this is a private stock buyback by OP's company, the company is spending cash to buy OP's shares. Simultaneously, the company is increasing its own shares by an equal amount. So the company balance sheet is not harmed. Consider, however, the impact on the company's cash position. The company may need to raise 1.8 million in cash to buy OP out, if it doesn't have that cash already.

If this were a publicly traded company, given a market capitalization of approximately 60 million dollars, such a sell could be well in excess of the average daily traded volume of the stock. The broker might be unable to fill the whole sell order at the current price, all at once. The market price may decline. A declining market price does not harm the company in the long term, and in fact may represent a buying opportunity for other potential investors. The market price will eventually correct itself.

However, from OP perspective in the above scenario, reducing the market price of company shares would affect the immediate value of shares held by other company shareholders... some of which OP may care about. To avoid impacting those other shareholders, OP may consider a more gradual reduction of their shares to zero.

If this is a private transaction between OP and another private investor, then the company isn't financially risking anything and the terms of the deal are private.

Answer 4

All of the other answers concentrate on the impact on the share price or company value of selling some small fraction of the company's shares. Depending on exactly how the shares are sold, and how large the market for the shares is this can vary from "none" to "non-trivial".

However the answers have all neglected the possible impact of the sale on investor sentiment. If the OP is a long-term employee or investor in the company and suddenly decides to dump his shares, other investors and potential investors might wonder "what do they know that we don't?" and the value of the shares would drop. If the OP is a senior member of the board and they sell all their shares, this is a more serious concern; if they are some junior employee who chooses to sell some small fraction of their shares, this is probably unimportant. (If this is the OP's employer, I would certainly suggest selling at least half the shares just to diversify their investments.)

The other question is "How does the OP know the shares are worth $1.8M (which implies a company valuation of $60M)?". If the shares are publicly traded, then it is easy to value the shares. On the other hand, if the company has just gone through a funding round and has got $15M funding in exchange for 25% of the equity, then that corresponds to a company valuation of $60M, but there may well be no-one interested in buying (some of) the OP's shares at that price.

Answer 5

If you intend to sell, you should be selling this in bits and chunks if at all possible. First to avoid oversaturating the market and causing investor worries, and second, for tax reasons.

It is sub-optimal to dump the entire stake onto the marketplace in one tax year, as this will push you into the highest tax brackets. So you want to sell some this year still, and then space out further sales into next year and beyond.

Yeah, yeah, timing the market... however the fact is we have been in an economic expansion for quite a long time, and all good things come to an end. You are carrying the risk that this stock could tank before you can sell it, as many stocks did in 2007-08. Conversely you'd then have the risk that you rush to sell it and then it continues to climb, and get stuck with both the tax disadvantages of a heavy sale and also the absence of gain.