California Law and Private Company Equity Transactions, Part I: What You Should Know If You Own Startup Stock

This article was originally published on LinkedIn on January 6, 2025.

This is the first in a series of posts about the California laws governing private company equity transactions and insider trading—rules that I think every person and company in the startup ecosystem should know as secondary‑market activity in private company stock continues to pick back up.

The inspiration for this series comes from Matt Levine’s Money Stuff newsletter. Levine wrote about insider trading and private company stock transactions in the U.S.’s secondary markets, asking, “Are you allowed to insider trade” private company stock? He posited, “I think the answer in the US is, mostly, no.”

I responded that the answer in California is “absolutely no, you can’t insider trade private company stock.” I made two points. First, California law prohibits the kind of insider trading Levine described. Second, many transactions in the U.S.’s secondary market are subject to California law, because so many startups and investors are located here.

Levine agreed, linking to my post in his newsletter and discussing it on his podcast. He also made three observations:

1. Insider trading cases related to private company stock are very rare; “no one’s suing” because “there’s less ability to find out that there was insider trading.”
2. As private company tender offers increase, we’ll “eventually see some [more] lawsuits.”
3. But, for now, it is “not a well‑known thing” that insider trading laws apply to private company stock.

He’s right, but each point is worth expanding on.

These Disputes Are More Common Than They Look

While it is harder for someone to figure out that they lost money due to insider trading, there are more disputes related to private company insider trading than it might appear—I’ve worked on several. Many startup insider trading cases simply aren’t litigated publicly. Instead, these disputes are often resolved before any public lawsuit is filed, or they are arbitrated privately, keeping them out of the public eye.

The Two‑Transaction Pattern

Discovery of insider trading isn’t limited to tender offers. Startup insider trading disputes often follow a straightforward, two‑transaction pattern.

First, there’s a minor transaction in which one party has access to inside information, the counterparty doesn’t have that access, and the party with access doesn’t share the inside information. Second, there’s a major company transaction—a funding round, merger, or acquisition—not long after the first, and the share price for the major transaction is much greater than the share price for the minor one. When the counterparty to the minor transaction learns about the major transaction, that counterparty—who didn’t have access to inside information—concludes (rightly or wrongly) that inside information must have been withheld from them.

Why This Matters Now

Most important: insider trading laws need to become “a better‑known thing” for anyone with startup equity—investors, companies, founders, operators, and employees alike.

The conditions are primed for an uptick in private company insider trading. The startup market went cold in 2022. Since then, many shareholders have been eager to liquidate equity in private companies but have had no viable way to do so. As the market heats back up, companies, operators, and others with access to confidential information will have opportunities to exploit that access through insider trading that precedes a major company transaction.

I want to help prevent this problem, which can destroy livelihoods and personal relationships. So, over the coming posts, I’ll discuss California’s insider trading laws, how they apply to private companies and their shareholders, and the rights and remedies available when one party engages in prohibited insider trading.

Continue with Part II: Insider Trading.

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