October 23, 2026
Buyer stock is worth what you can sell it for, not what the LOI says it is worth. Before you accept it, find out how the shares are valued, what class you're getting, when you can sell them, what sits above you in the buyer's capital structure and how the buyer is legally allowed to issue them to your stockholders. Stock from a public buyer is a pricing and timing question. Stock from a private buyer is a diligence project, because you are becoming an investor in a company you didn't choose.
Key takeaways
The first question is what the stock is worth at closing, and the agreement answers it one of two ways. A fixed share count means the buyer issues a set number of shares. If the buyer's stock price rises between signing and closing you receive more value, and if it falls you receive less. A fixed dollar value means the buyer issues however many shares are worth the agreed amount at closing, usually measured by an average trading price over a short period before closing. Many public buyers combine the two with a collar, which fixes the share count within a band of prices and adjusts outside it.
Example. A public buyer offers $20,000,000, half in cash and half in stock. At signing, its shares trade at $50.00, so the stock portion is 200,000 shares. If the agreement fixes the share count and the price falls 20% to $40.00 by closing, the stock portion is worth $8,000,000 and your deal is now $18,000,000. With a fixed dollar value you receive 250,000 shares worth $10,000,000 at the $40.00 closing price. Each side wants the other to carry the price risk, so a collar is the usual compromise.
A private buyer has no trading price, so the LOI will propose one, almost always the price per share from its last preferred round. Two problems follow. First, you will usually be offered common stock, not preferred, and common in a venture-backed company is worth considerably less than the preferred because it sits below the preference stack. The buyer's own 409A valuation says how much less. Second, that last-round price may be stale.
Example. A private buyer offers $20,000,000 for your company, $10,000,000 in cash and $10,000,000 in its common stock valued at $10.00 per share, the price its Series C investors paid for preferred stock a year ago. That is 1,000,000 shares. The buyer's most recent 409A valuation puts its common at $4.00 per share, so by the buyer's own appraisal you are receiving $4,000,000 of stock, and your $20,000,000 deal is closer to $14,000,000. The fixes are to ask for Series C preferred instead of common, to price the common at the 409A value so you receive 2,500,000 shares, or to take more cash. See How to Value Startup Stock: Fair Market Value vs. Venture Value.
Cash at closing is spendable. Stock has to become cash, and the agreement controls when that can happen.
Stock from a public buyer is usually freely tradable if the buyer registered the issuance on Form S-4, except for holders who become affiliates of the buyer, who sell under Rule 144, with a lock-up of 90 to 180 days that the buyer asks founders and large holders to sign. If the buyer instead issued the shares in a private placement, they are restricted securities, and under Rule 144 holders of a reporting company's stock can generally sell after six months, with volume and manner-of-sale limits for anyone who is an affiliate of the buyer. Ask for registration rights so the buyer must register your shares for resale, and ask that the lock-up release in stages rather than all at once.
Stock from a private buyer has no market at all. You will sign a joinder to the buyer's stockholders agreements, which usually include a right of first refusal on transfers, a co-sale right, a drag-along and a lock-up in any future IPO. The realistic exit is the buyer's own sale or IPO, which could be years away. Ask about secondary sales, whether the buyer runs tender offers for employees and early holders, and whether your shares would be included.
If part of the stock goes into escrow, agree how escrowed shares are valued for claims. A buyer whose shares have fallen may want to count them at the lower price, which means more of your shares cover each dollar of claim.
Taking private buyer stock makes you an investor in that company, so run the diligence an investor would run. Review the certificate of incorporation and the full cap table, including the preference stack, the option pool, warrants and any convertible notes or SAFEs, and model what your common stock would receive if the buyer were sold at its last valuation and at half of it. Review the financial statements, cash on hand, burn and runway, debt and any venture loans, pending litigation and the terms of the buyer's most recent financing. Ask for representations from the buyer about its capitalization, financial statements and absence of undisclosed liabilities, backed by an indemnity, since the buyer will be asking the same of you. Ask for information rights so you receive financial statements after closing, and for the same protective rights the buyer's last-round investors negotiated if you're receiving preferred.
| Question | Public buyer | Private buyer |
|---|---|---|
| How is the stock priced? | Trading price, fixed count or fixed value, collar | Last round price; ask for preferred or 409A pricing |
| When can I sell? | After lock-up; Rule 144 if unregistered | At the buyer's exit, unless secondary sales are allowed |
| What am I signing? | Lock-up, maybe registration rights | Joinder to stockholders agreements, ROFR, drag-along |
| What do I need to diligence? | Public filings, recent price history | Cap table, preference stack, financials, debt, runway |
| Who bears price risk to closing? | Set by the pricing mechanism | The seller, since the price is fixed by the buyer |
Issuing stock to your stockholders is a securities offering by the buyer, and the buyer needs an exemption or a registration for it. A public buyer often registers the shares on Form S-4, which lets every holder receive stock. A private buyer, and some public buyers, rely on the private placement exemption, which works cleanly for accredited investors and requires detailed disclosure, including financial statements, if any non-accredited holders are included (no more than 35, each of whom must be financially sophisticated alone or with a purchaser representative). Rather than prepare that disclosure, buyers frequently pay non-accredited stockholders in cash and issue stock only to accredited ones. Early employees and small angels are the ones most likely to be affected, so check your cap table for who is accredited before you agree to a stock deal. Where the deal has a California connection, such as a California headquarters or stockholders in California, a fairness hearing before the California Department of Financial Protection and Innovation under Corporations Code Section 25142 offers another route that lets all holders receive stock.
Receiving cash in a sale is generally taxable. Receiving stock can sometimes be structured as a tax-deferred reorganization, in which tax on the stock portion is deferred until you sell the buyer's shares, while any cash is taxed now. Whether a deal qualifies depends on the structure and on how much of the price is paid in stock, and the buyer's preferred structure may not be the one that works for your holders. Qualified small business stock treatment can also, in some cases, carry over to buyer stock received in a reorganization. These questions change the after-tax value of the offer, so have a tax advisor model the structure before you agree to it. See QSBS (Section 1202).
For more, see How Do I Read an Acquisition LOI?, Escrow, Holdbacks and Indemnification, Preferred Stock vs Common Stock and Can Founders Sell Shares Before an Exit?
If a buyer has offered you stock, contact us before you agree on how it's valued.
