5 common questions about investing in unlisted companies
If you’re used to buying shares on the stock market, it doesn’t have to be a big leap to invest in unlisted companies as well. At Sciety, we frequently receive questions from people who are considering making their first investment in an unlisted company. Practically speaking, how does it work? And what happens next?
Where do I see my shares in unlisted companies?
Shares in unlisted companies are not ordinarily included in the custody account where your shares in listed companies are found. Instead, you will usually receive a copy of the company’s share register as proof of your holdings. The share register lists all shareholders in the company and is legal evidence of who owns shares in it.
Unlisted companies usually manage the share register internally. Some unlisted companies manage the share register with Nordiska Värdepappersregistret or E-Aktiebok and give their shareholders online access to it, while others manage the share register using Word or Excel. Unless a company has very few shareholders, we usually recommend managing the share register online as an easy way to create transparency and stay organized.
Can I have shares in unlisted companies in my investment savings account?
The Swedish Tax Authority does not permit unlisted shares in an investment savings account, but buying shares in unlisted companies may confer the right to an investor deduction. If the terms for the deduction are met, you can deduct up to 50% of the invested sum in capital gains in conjunction with the investment. Read more about the investor deduction here. (In Swedish)
What are the benefits of a shareholders’ agreement with unlisted companies?
Many unlisted companies use shareholders’ agreements to give different shareholder groups rights and obligations in addition to what is regulated in the Swedish Companies Act and the articles of association. For example, a shareholders’ agreement can be used to give external investors the right to greater insight and influence at the company than they would ordinarily be entitled to early on when the founders often own a significant portion of the company.
Conversely, a shareholders’ agreement can be used to entitle the founders to more influence than their ownership confers at a later phase when they will typically be diluted in conjunction with raising capital. We often think it is especially important to include provisions on intellectual property rights, disclosure of information, tag-along, drag-along, and voting majority when determining certain issues in the shareholders’ agreement.
How do I sell my shares in an unlisted company?
The basic rule is that you may sell shares freely if you find a buyer. For the purchase to be recorded in the share register, as a rule, you must sign a purchase agreement and send a copy to the company. However, it is common for unlisted companies to limit the right to sell shares through provisions in the articles of association or shareholders’ agreement.
For example, these limitations may include a requirement to request approval from the company’s board of directors first (so-called consent clause) or to offer the shares to existing shareholders first (so-called right of first refusal clause). Usually, however, the sale occurs when another company makes an offer on all shares in the company, or when the company goes public. Before you invest, it is good to consider your investment horizons and to understand the company’s plans.
How do I know whether things are going well for the company without a share price?
Evaluating shares in a company is harder when the shares are not listed on the stock exchange, but one method is to start from what investors were willing to pay for the share as of the company’s last rights issue. Another option is to examine the company’s current situation.
We usually recommend entitling shareholders in the shareholders’ agreement to comprehensive, twice-yearly information about, for example, sales, new customers, product development, and so forth, to provide an overview of how things are going for the company. As with investments in listed companies, you can also look at the company’s annual report and participate in the general meeting of shareholders to obtain information about the company’s development.
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