A private corporation is any corporation that does not trade its stock on a public stock exchange. The private corporation can be small and owned by a handful of friends or family members or it can be as large as any public corporation. The important distinction is that the stocks of a private company cannot be easily purchased by a third party by calling a broker and making a stock market trade. Many private companies restrict the purchase and sale of their stock to retain control of the company, requiring holders to sell the stock back to the company or to existing stockholders and prohibiting sales to outsiders.
1. Contact the current stockholders of the private corporation to express your interest in investing. If the private company is small, this may entail a simple phone call to the person running the business. If the private company is large, you may have to contact the finance department or investor relations department to assess the situation.
2. Negotiate a stock sale price. Private companies do not sell their stock on a public stock exchange, so there is no arm's length way to establish the company's stock price. You will have to rely on your own business acumen and a personal assessment of the company's financial condition to establish appropriate investment terms.
3. Draft a stock purchase agreement that includes the terms of the sale. Execute the agreement and exchange the sales price for the stock certificates. Although the stock of private companies is not registered on a stock exchange, the sale of stock is still a regulated transaction. Comply with state and federal laws regarding the sale and purchase of private company stock, depending upon the location of the company and the size of the transaction. This may include paying a transfer tax or filing a notification of the sale with a government agency.
4. Contact a venture capital or private equity firm or an angel investor network for third-party opportunities to invest in large private companies. Typically, your broker or wealth management firm can arrange this transaction. You must qualify as an accredited investor to buy shares of private corporations in these ways, however. An accredited investor makes a showing of a high enough net worth to qualify him as a sophisticated investor who does not need the buying protections of the regulated stock market. The typical net worth for accreditation is $1 million, exclusive of a person's primary residence.
5. Buy shares of private corporations on a secondary market. A number of companies have created electronic website marketplaces for people to buy and sell shares of private companies. An example is SharesPost.com. The secondary marketplace operates very much like an ordinary broker transaction, except the market is not regulated and the investor is responsible for conducting his own investment due diligence.
- Sergey_P/iStock/Getty Images