Private Stock Question

[gatortator]

Hey all!

I have some questions on experiences with private company stock.  Recently, we received the opportunity to become owners in the privately owned consulting firm that employs my husband.   This would be accomplished by us purchasing private company stock. 

Since I am still  trying to understand some aspects of this ownership, I thought I would post a topic here, since many of you are more savvy investors than I am. 

1-  I couldn't find this topic already discussed here on the forum.  If you know of a link I missed, please let me know.
2-  Links to any useful books or websites on the this topic are also appreciated.  Thanks in advance!
3-  For those of you who own private stock, were you required to only make a one time purchase, or were you expected to continue to buy more after the initial purchase.
4-  How was the purchase financed?  What were the company expectations on payment?
5-  Have you explored putting the private stock into a 401k? 
6-  Any advantages or disadvantages you have found with company ownership/partnership?  Given a chance to go back,  would you still make the same decision?

I am sure there are other aspects to this that I haven't thought of yet so please chime in with any relevant comments for things I missed.

[Cheddar Stacker]

1-  I posted a thread a few weeks back about selling my private stock but it wasn't intended for public discussion, so there isn't much to see.
2-  I got nothing, sorry.
3-  One time purchase. However, at some point you may be expected to buyout the other owners as they retire.
4-  5 years, no interest, paid as a withholding from annual bonus.
5-  No. Look into a Self-Directed IRA. You can't really do this if you have heavy involvement with the company.
6-  Advantages - Higher salary, more control.
      Disadvantages - Stock is unmarketable, there was really no return on the investment (other than higher wage) and ours is not only private but restricted. I have no control over the sale/purchase of the company.
      Would you still make the same decision? Yes. I'm a partial owner where I work. I'm paid well. It was worth it to me, although disappointing in some ways.

[forummm]

Be careful about putting your savings into the place where your income is from. If the business hits hard times you could be out your savings and your income. I would only invest in the company I worked for if I was getting a huge deal (like significantly better than would be available on the market).

[Frugalicious]

I purchased private, restricted stock in a former employer.  It was a small tech startup who was eventually sold after 5 years.  Upon the sale, I received my capital investment plus about 35%.  I probably  would not choose that investment again because there was no market to sell the stock and all of the partial owners were waiting for the company to either go public or be bought.  I consider myself lucky to have not lost money on the deal.

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[DaveR]

Kudos on asking questions and working to understand the risk/reward for the opportunity. Keep asking questions until you are comfortable.

One big thing with private company stock is that there is liquidity risk--if you need to sell, your options are likely limited to non-existent.

You're buying stock, so you are a co-owner in the company, for better or worse. That can be good if the company is profitable and paying stockholders dividends. When losses occur...well, lots of things can happen. A dollar in private company stock is riskier than a dollar in public company stock.

I'm not sure the level of ownership (and thus voting rights and control) the purchase would allow you within the company. You're buying a business (at least a percentage of one), so you need to think about it's capitalization, cash flows, and risks. It takes some due diligence.

There will be some legal docs: an ownership/partnership agreement. Read those, understand those, figure out the worse possible scenario (oh, like a senior partner embezzling $2.3m of company funds) and think about what that means to your finances.

Also, the fact that you ask about financing the purchase...that's scary. If you have to finance or borrow to make it happen it's probably a sign you should steer clear.

[rmendpara]

You mentioned consulting firm, so I'm assuming he was offered partnership?

Every firm is different, but the firms I am familiar with basically have you buy into the partnership. The equity is non-transferable, meaning you can re-assign it or sell it to anyone else without certain share of votes among partners (very unlikely, for obvious reasons).

On the other hand, the partners tend to not have a ton of liability. Depending on the type of services the firm provides, the worst that could happen would be the firm goes under, but clients don't tend to sue consultants... they are just giving advice and/or outsourcing some work for the client. DO NOT assume it's risk free. Make sure you understand the partnership agreement and what may come out of it.

3) "expected" or "required"? These are two different things.
4) Generally the company will finance the equity purchase through either salary or bonuses for a few years. Most people don't have hundreds of thousands of dollars in cash lying around. It's possible to get a bank personal loan or other unsecured debt, but it is tough to get enough cash (most have limits well under $100k).
5) Get in contact with a self-directed IRA provider, and also read carefully through the IRS rules for IRA's. My assumption is that you cannot do this, since your payouts are too similar to salary. I'd speak with an experienced accountant to understand things better. An IRA provider may let you put whatever you want in there, but years later the IRS could come around and "disallow" the contributions and cause a real headache.
6) It's no different than 5 dudes (and/or ladies) getting together and opening a lemonade stand. Of course, your business will be more complex, but you basically put up equity and own a business together. Sort of like getting married, so just know that any real dispute will have to go to court, so make sure the partnership agreement is well written, and even more importantly, make sure you really trust the other partners on a personal level (for a small firm, especially).