Equity management
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Key takeaways:
A private company is a business entity whose ownership shares are held privately and cannot be bought or sold on a public stock exchange. It has no obligation to register its securities with the Securities and Exchange Commission (SEC) for public trading.
Ownership of a private company typically rests with its founders, family members, employees who hold equity, and institutional investors such as venture capital or private equity firms. In every case, those ownership interests were acquired through private, negotiated transactions rather than open market purchases. This is the defining characteristic of private ownership, and it is what distinguishes a privately held company from a publicly traded one.
A private company works by raising money from a limited pool of private investors, issuing shares directly to those investors, and keeping ownership records internally rather than through a public exchange. Decisions rest with founders, the board, and shareholders as defined in the company's governing documents.
In practice, this process typically works as follows. The company incorporates in a state (Delaware is the most common choice for venture-backed startups), adopts bylaws, and authorizes a pool of shares. When it needs capital, it sells shares or convertible instruments to investors under an SEC exemption, most commonly Regulation D for fundraising and Rule 701 for employee equity grants.
Governance stays close to the ownership. A five-person board can approve a new option pool in a single meeting, without proxy statements or public shareholder votes. The trade-off is that shareholders have limited liquidity: they generally can't sell until the company runs a tender offer, gets acquired, or goes public.
Reporting obligations are lighter too. Private companies don't file 10-Ks or 10-Qs. They still answer to the Internal Revenue Service (IRS), state regulators, and their own investors, who typically negotiate information rights that require quarterly financials and an updated cap table.
Private companies in the US take several legal forms, and the structure you choose shapes taxation, liability, and your ability to issue equity. Here are the five you'll encounter most often.
The simplest form of private business, owned and operated by a single individual with no legal separation between the owner and the enterprise. The owner receives all profits and bears unlimited personal liability for business obligations. Most single-owner businesses begin under this structure by default.
A partnership is a business owned by two or more people who share profits, losses, and management responsibilities. General partnerships expose every partner to personal liability, while limited partnerships (LPs) and limited liability partnerships (LLPs) shield some or all partners.
Partnerships are pass-through entities for tax purposes, so profits flow to the partners personal returns. Ownership is defined by the partnership agreement rather than shares, which makes them common for professional services firms and investment funds but rare for startups planning to raise venture capital.
A limited liability company (LLC) is a hybrid structure that combines the liability protection of a corporation with the pass-through taxation of a partnership. Owners are called members, and ownership is tracked in membership units rather than shares.
LLCs work well for small businesses, real estate holdings, and family-owned companies. They're a poor fit for venture-backed startups because most institutional investors require a C corporation before they'll invest, and equity compensation in an LLC (typically profit interests) is harder to administer than stock options.
A C corporation is a legal entity that is taxed separately from its owners under Subchapter C of the Internal Revenue Code. It can issue multiple classes of stock, take on unlimited shareholders, and grant stock options, which is why nearly every venture-backed startup in the US is a Delaware C corp.
The C corp's flexibility is what makes modern startup equity possible. Preferred stock for investors, common stock for founders, Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs) for employees, and Section 1202 QSBS treatment for early shareholders all depend on the C-corporation structure. The trade-off is double taxation: the corporation pays tax on profits, and shareholders pay tax again on dividends.
An S corporation is a corporation that elects pass-through taxation under Subchapter S, so profits and losses flow directly to shareholders' personal tax returns. It avoids double taxation but comes with strict limits: no more than 100 shareholders, one class of stock, and shareholders must be US individuals or certain trusts.
Those restrictions rule out venture capital, since VC funds can't hold S corporation stock and preferred shares aren't allowed. S corps suit profitable small businesses with a stable, small ownership group, not companies planning to raise institutional rounds.
Valuing a private company is harder than valuing a public one because there's no market price to reference. Instead, valuations rely on structured methods, each suited to a different purpose and company stage.
A 409A valuation is an independent appraisal of a private company's common stock, required by IRS Section 409A whenever the company grants stock options. It sets the fair market value (FMV) that determines the strike price of employee options, and it must be refreshed at least every 12 months or after a material event like a funding round.
Getting a 409A valuation wrong carries real consequences. If the IRS finds options were granted below FMV, employees face immediate taxation plus a 20% penalty on deferred amounts. That's why most companies use an independent valuation firm, which also provides safe harbor protection under IRS rules.
At Qapita, 409A valuations are part of the platform rather than a separate vendor relationship. Companies we work with pair the valuation with plan design consulting and analyst support, so the number connects directly to the option grants it governs.
A discounted cash flow analysis values a company by projecting its future cash flows and discounting them back to present value using a rate that reflects the investment's risk. It's the most theoretically rigorous method and the anchor of most formal valuations.
DCF works best for companies with predictable revenue, which makes it more reliable for a profitable Series C SaaS business than a pre-revenue startup. Small changes in the discount rate or terminal growth assumption can swing the result significantly, so appraisers usually pair DCF with market-based methods.
This method applies the valuation multiples of similar publicly traded companies, based on revenue, EBITDA, or other metrics, to the private company's financial results. A discount for illiquidity is customarily applied, reflecting the absence of a ready market for the shares.
Precedent transaction analysis looks at what acquirers actually paid for similar companies in recent M&A deals. Because acquisition prices include a control premium, this method typically produces higher values than comparable company analysis.
It's most useful when a sale is on the table or when recent deals in your sector give clear pricing signals. The limitation is data availability: private deal terms are often undisclosed, so the sample of usable transactions can be thin.
Asset-based valuation calculates a company's worth as the fair market value of its assets minus its liabilities. It sets a floor value and suits asset-heavy businesses like manufacturing or real estate holdings.
The core difference is that a public company's shares trade on a stock exchange and a private company's don't. That single distinction drives nearly everything else: disclosure, liquidity, governance, and cost.
Staying private is a strategic choice, not just a stage on the way to an IPO. Here's how the trade-offs break down.
Pros:
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Now, let’s look at how private companies raise capital to fund growth.
Private companies raise capital by selling equity or equity-linked instruments to private investors under SEC exemptions, most commonly Regulation D. The instrument and investor type shift as the company matures.
Angel investors are individuals who invest their own money in early-stage companies, typically writing checks between $10,000 and $250,000. They usually invest at the pre-seed or seed stage, often through SAFEs or convertible notes rather than priced equity.
Accredited individual investors provide early-stage capital in exchange for equity or convertible instruments such as SAFEs, often contributing industry expertise and networks alongside funding.
Venture capital firms invest pooled institutional money into high-growth startups in exchange for preferred stock. VC rounds are priced, structured, and lettered, Series A, B, C, and beyond, with each round setting a new valuation and adding terms like liquidation preferences and board seats.
Venture funding reshapes your cap table with every round. New preferred classes, option pool expansions, and pro-rata rights all stack up, which is why companies that raise multiple rounds need equity records that hold up to investor and auditor scrutiny.
A SAFE (Simple Agreement for Future Equity) is an instrument that converts into shares at a future priced round, usually at a discount or capped valuation. Convertible notes work similarly but are structured as debt with interest and a maturity date.
Both let early-stage companies raise quickly without setting a valuation. The risk is stacking: founders who raise several SAFEs at different caps often underestimate the combined dilution until the notes convert. Modeling conversion scenarios before the priced round prevents that surprise.
Private equity firms invest in more mature private companies, often taking majority ownership through buyouts or significant minority stakes through growth equity. PE deals typically involve companies with proven revenue and profitability rather than early-stage startups.
For founders, PE offers a path to partial liquidity without an initial public offering (IPO). A growth equity round can let early shareholders sell a portion of their stake while the company stays private.
Private companies manage equity through three connected systems: a cap table that records who owns what, vesting schedules that govern when ownership is earned, and liquidity events that let shareholders convert equity into cash.
A cap table (capitalization table) is the record of a company's ownership, every shareholder, share class, option grant, and convertible instrument, along with each holder's percentage on a fully diluted basis. It's the document every investor, auditor, and acquirer will scrutinize.
Cap tables start simple and get complicated fast. Add a seed round, an option pool, three SAFEs, and a Series A, and a spreadsheet starts producing errors that surface at the worst moments, usually during diligence. That's why growing companies move to a dedicated cap table platform that keeps issuances, transfers, and conversions reconciled in one place. Qapita manages equity for 2,800 customers, including 57 unicorns, with over $67 billion in equity on the platform.
A vesting schedule determines when founders and employees actually earn the equity they've been granted. The US standard is four years with a one-year cliff: nothing vests until the first anniversary, then the remainder vests monthly.
Vesting protects the company from departures and keeps incentives aligned over time. Related mechanics matter too: an 83(b) election lets a founder or early employee pay tax on restricted stock at grant (when the value is low) rather than as it vests, and the filing deadline is 30 days from the grant date.
A liquidity event is any transaction that lets shareholders convert equity into cash, including acquisitions, IPOs, tender offers, and secondary sales. For companies staying private longer, structured tender offers have become the main way to give employees liquidity between rounds.
Running a tender offer cleanly requires knowing exactly who holds what, at what strike price, and with what vesting status. Companies we work with often run their first employee tender within a year of a growth round, and the ones that go smoothly are the ones whose equity records were audit-ready before the process started.
Companies stay private to keep control, avoid public disclosure, and escape the cost of SEC reporting and quarterly earnings pressure. Abundant private capital and structured tender offers now provide funding and shareholder liquidity that once required an IPO, so many companies see little reason to go public until scale demands it. (48 words)
Going public makes sense when a company needs capital beyond what private markets offer, wants a liquid currency for acquisitions, or must provide broad shareholder liquidity. It also becomes practical once revenue is predictable enough to withstand quarterly scrutiny and the company can absorb ongoing compliance costs, typically several million dollars per year.
Yes, in nearly all cases. A limited liability company is a private structure by default: its membership interests do not trade on any exchange, and transfers of ownership are governed by the operating agreement.
A private company is owned by its shareholders or members, typically some combination of founders, employees with vested equity, family members, angel investors, venture capital funds, and private equity firms. Ownership stakes and rights are recorded on the company's cap table and defined in its governing documents and shareholder agreements.
Generally no. Private companies are exempt from the periodic reporting that public companies file, like 10-Ks and 10-Qs. They still file exemption notices (such as Form D) when raising capital, and a company with more than 2,000 shareholders of record can trigger registration requirements under Section 12(g) of the Exchange Act.
6. Can employees sell private company stock?
Yes, but only through channels the company permits. Employees can sell vested shares in company-run tender offers, approved secondary transactions, or after an acquisition or IPO. Most private companies impose transfer restrictions and rights of first refusal, so employees should check their grant agreements and company policy before attempting any sale.
