What Rights Do Shareholders Have In A Private Company?
Private companies may grant shares to their shareholders, this should not be confused with convertible securities which is another type of equity that converts into equity when exercised.
Convertible securities are debt instruments and can be freely converted into the issuer's equity through the issuance of new debt. Stockholders do not have any such rights in convertible securities.
This is one of the fundamental differences between convertible securities and common shares.
When a company wishes to introduce debt instruments to the market, this will mean that the stockholders will be issued debt securities which will obligate them to pay a dividend or share of the profits.
This is part of the contract and it should not be misunderstood as a conversion of the equity.
What Rights Do Shareholders Have In A Private Company
A common shareholder will not have any say in the administration of the company. He does not get to nominate the directors and cannot withdraw the subscription at will.
The only thing he can do is to vote for the board of directors. This would however not affect his stake in the company.
Convertible securities are the basic unit of trading. If you hold a stake in convertible security, you can convert it whenever you want to. This could be anytime at all, a few days, or none at all. In that scenario, your cash holding will become debt.
When you wish to convert, you can do so anytime and there are no time-bound constraints.
A common shareholder holds not just the equity but also the debt of the company. A conversion of the debt in such a case does not affect his stake in the company. However, this can only be done after the company qualifies for an IPO.
When a company introduces a new equity issuance, it qualifies for an IPO. This would mean the company would be free to choose its trading date.
If the company decides to take the trading public, the common shareholder may have no stake in the company.
When the company wishes to convert debt security, it is important to understand that it is converting debt and not equity. This does not mean the debt is simply being replaced with common equity. The amount of common equity at issue is known as the ‘initial conversion price'.
This conversion price is fixed for the period between initial public offering and subsequent resale. The price could be fixed for one year, or one month, or one week, or for any duration not being shorter than ten trading days.
The price could be exclusive. This also means that you have a right to the common equity but not to the converted debt. In other words, you would be entitled to common equity but not to the converted debt, if the price of the latter changes.
Also, it can be emphasized that an IPO can be initiated even if you are not a majority shareholder. Thus, while you may opt for a holding period of ten years, the company may decide to issue its securities at a price of one month.
IPO Of A Private Company
The same is true for an IPO of a private company. While you may not want to participate in the trading of the company's common shares, you are free to participate in the issuance of its securities.
Thus, they do not follow a fixed formula and are open to interpretation. This is a result of the fact that the value of the shares is not based on the shares' intrinsic value, but on the stock exchange values. This results in a lot of discretion in the setting.
This is true even if the company does not issue with a public offering. This applies to any private company where the shareholders decide to go with an IPO. This system results in a lot of price variations in the common shares.
Prices Of A Stock
Thus, this results in a lot of opportunities for the traders to buy and sell the shares. It is very common to see the prices of a stock moving up or down ten percent or more within a single trading day.
This means that if you had purchased a certain number of shares, they will cost less at the time of the IPO than they did at the opening of the market the next day.
The shares are more often than not offered by a company that does not seem to be on the radar of the stock exchange. That does not mean that the company is of poor quality. It could be that the exchange was hacked.
Or the company may have more expertise in the technology field than the others. This is a result of the fact that the company has created an internal technology that is a big hit. This also means that the company has come out ahead of the others who focused more on trading and sales.
Marketing The Shares
This is also true in the case of the IPO of a private company. While other companies concentrate on marketing the shares, a company that does not focus on marketing may opt to issue its securities through the IPO route.
This is due to the fact that this allows the company to focus on developing its technology. This means that the company will be able to keep better track of its technology.
The company will be able to modify its existing technology and integrate it into its own platform. Thus, the security can be protected by the fact that they are integrated with the internal system. Also, the company can easily raise money via the public markets.
While companies who focused on marketing had to go through the stock exchange, the focus on developing their own tech was a perfect example of good news versus bad news.
While companies who focus on development could face some challenges, there was more potential to profit while dealing with this approach.
Companies that focus on development, had greater chances of innovation. As such, the share prices could have more variance as the company could use its internal expertise to improve the technology while incorporating the latest software and gadgets.
This was a perfect example of the technology taking hold versus failing to make headway. Thus, the company could continue to increase the profitability while the share prices remained consistent.
While the company could have faced some challenges due to the fact that the stock could have had some volatility, this did not mean that the company was a bad investment.
Many companies were using the same strategy, in fact, they were the first company to go public using the tech focus on innovation. That they had the necessary resources to overcome challenges and still manage to turn into a good investment.
Strong Stock Candidate
While the stock was volatile during the initial days, over the longer term, the stock should trade in line with its fundamentals.
The company had a strong revenue stream and a good profit margin.
The market would likely see this as a strong stock candidate and the stock could easily move higher with positive momentum.
As this particular company was on the right track to going public, I chose to short the stock to test the strategy out.
As this particular stock only traded around $0.10, it did not have many traders to speak of.
As such, there were not many investors to contend with either. Thus, I was able to quickly short 2000 shares which equated to a stock price of $0.12. This, together with two days of good market data proved to be a powerful combination for me.
The first day, the stock turned over and over before finally trading stable at $0.12. This was an amazing achievement for a small public company. From this point on, the stock was not challenged until the next trading day.
The stock finally did break through the resistance line, for which I am extremely grateful. The next day it traded higher which proved to be supportive in a larger sense, but I still chose to short the stock to test this strategy out.
On the next trading day, the stock finally broke above its support and surged upwards for a stock price of $0.17. Here I was able to beat my risk-adjusted target by 5 cents.
Bullish Market Data
Thus the stock finally topped off after only six days of bullish market data. The stock finally became a strong candidate to resume the uptrend.
However, in the following trading session, the resistance line was broken and the stock sold off hard. This caused my losses. I ended up making approximately $800 instead of the $900 I was expecting.
That is a lot of money for a short position. But the scenario did occur. The stock is obviously an outstanding company and its technology has huge potential.
I do not think the short-term swing down was an indication that the company is trading at a high price.
The above was my analysis.
What should you do? I cannot answer that question.
You should do what works for you.
1. Short and sell on support. This proves more valuable in the short term.
This is an example of selling short.
2. You should still be watching the stock every day.
In a big up-trend, you do not want to be short, because you will only be called out of your position. For shorting strategies see my article: The Ultimate Guide to The 7 Worst Things You Can Do to Your Portfolio.