The defining feature is the absence of a market
When a private company raises money at a £50m valuation, that number describes the price one investor paid for one slice on one day, usually with preferential rights attached. It is not a market price. Nobody is obliged to buy your shares at it, and frequently nobody will buy them at all.
This is the single most misunderstood thing about private equity ownership, and it applies equally to the employee with share options and the angel investor with a spreadsheet full of paper gains.
Preference stacks
Investors rarely buy ordinary shares. They buy preference shares with a liquidation preference — the right to get their money back, sometimes a multiple of it, before ordinary shareholders see anything. Stack several rounds of this and a company can sell for a headline £40m while ordinary shareholders and option holders receive nothing at all.
Anyone holding or being offered private equity should read the articles and the shareholders' agreement specifically for: the liquidation preference and whether it is participating, drag-along and tag-along rights, pre-emption rights, and any good leaver / bad leaver provisions on employee shares.
UK tax reliefs
The UK offers unusually generous incentives here. EIS gives 30% income tax relief on qualifying investments, CGT exemption after three years, and loss relief against income. SEIS is more generous still for very early companies. These reliefs exist because the underlying risk is extreme, and they materially change the arithmetic — but they also attract investment into companies that would not otherwise deserve it.
How you would actually trade it
Primary routes: angel syndicates, crowdfunding platforms, EIS/SEIS funds, or employee share schemes such as EMI options.
Selling is the hard part. Options are a secondary sale to an existing investor, a company-run buyback or tender, a specialist secondaries broker, or waiting for an acquisition or listing. All require board consent under typical articles, and all can take months. Assume you cannot sell and treat any liquidity as a bonus.
What goes wrong
- Most early-stage companies fail. The expected outcome for a single investment is a total loss; the model only works across a portfolio.
- Dilution. Later rounds issue new shares; without pre-emption rights and the money to follow on, your percentage falls every time.
- Preference stacks can leave ordinary shareholders with nothing in an otherwise successful exit.
- No disclosure obligations. You may learn about serious problems long after the people running the company do.
- Valuation illusion. Paper gains from the last round are not money, and crowdfunding platform portfolio values are not marks anyone will pay.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.