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There are six ways to distribute sale proceeds to shareholders: the buyer wires each holder directly, the seller's law firm pays out from its client account, a professional paying agent does it, the company receives and distributes, the company's payroll pays the employee option holders, or an onchain payment router pays a small group in one transaction. What separates them is the number and type of holders: how many there are, whether any of them is an employee or lives abroad, and how many documents must come back before each one can be paid.
No method is the best in the abstract. A sale with five shareholders at the closing table is a list of five wires. A sale with two hundred holders, sixty option holders and an escrow released eighteen months later is an administration project with tax reporting attached, and it is the reason paying agents exist.
This article covers general practice in private company sales; tax forms and withholding rules are given for the United States where an example is needed, and they vary by country. It is general information, not legal or tax advice.
Backup withholding rate from the Internal Revenue Service; payment timing from SRS Acquiom's published payments data (transactions through April 2018); recipient limit given by Shaka.
What are the ways to distribute sale proceeds to shareholders?
Sale proceeds reach shareholders through one of six routes: direct wires from the buyer, the seller's law firm, a paying agent, the company itself, the company's payroll, or an onchain payment router. Most sales use two of them together, because employee option payouts usually cannot travel the same route as shareholder payments.
- Direct wires from the buyer. The purchase agreement carries a funds-flow schedule, a table listing every recipient, amount and bank account. On closing day the buyer's bank sends one wire per line.
- The seller's law firm. The buyer sends one wire to the law firm's client account (called a trust account or an IOLTA account in the United States). The firm then pays each holder from that account according to the allocation schedule.
- A paying agent. A bank, a trust company or a specialist firm is appointed in the purchase agreement under a paying agent agreement. It receives the buyer's money, collects each holder's documents through a portal, pays each holder once their file is complete, and issues the tax forms.
- The company itself. The buyer pays the company, or the company's own bank account is used after closing, and the company's finance lead sends the payments. This is common in an asset sale, where the company is the seller.
- The company's payroll. Amounts that count as employee compensation, typically cashed-out options, go through a payroll run so that income tax and social charges are withheld and reported.
- An onchain payment router. The buyer pays once, onchain, and a single transaction sends each holder their percentage at the same moment.
Escrow agents sit beside this list rather than in it: an escrow agent holds part of the price back and releases it later, and many paying agents fill both roles on the same deal.
How do the six methods compare on who holds the money and when holders are paid?
The six methods differ first on custody: either nobody holds the price between the buyer and the holders, or one named party holds it until each holder's file is ready. The longer the list of holders, the more useful a holder of the money becomes, because not every file is ready on closing day.
| Method | Recipients it handles | Who holds the money, and how long | When a holder is paid |
|---|---|---|---|
| Buyer wires each holder | A handful, limited by what the buyer accepts to send | Nobody; unpaid amounts stay with the buyer | Closing day, if the bank details are verified |
| Seller's law firm | A handful to a few dozen | The firm's client account, usually a few days | Closing day or the days after |
| Paying agent | Dozens to thousands | The agent's account, until each holder completes their file | Closing day for complete files; later for the rest |
| Company itself | A handful to a few dozen | The company's bank account | When the finance lead sends each payment |
| Company payroll | Employees and former employees only | The company, until the payroll run | The next regular or special payroll run |
| Onchain payment router | A small group; at most 20 per deal on Shaka | Nobody; the router does not hold funds | The moment the buyer pays |
Where nobody holds the money, a holder who is not ready on closing day is a problem for the closing itself: either the buyer keeps that holder's amount, or the closing waits. Where a party holds the money, a holder who is not ready delays only their own payment, and the other holders are paid on time.
What documents and tax work does each method cover?
Only two of the six methods do tax work as part of the service: a paying agent for shareholder payments, and payroll for compensation. The other four move money and leave documents, withholding and reporting to the parties and their advisors.
| Method | Documents collected before payment | Tax withholding and reporting | Record produced |
|---|---|---|---|
| Buyer wires each holder | By the lawyers, before closing | Not handled by the wire; the parties arrange it | Funds-flow schedule and bank wire confirmations |
| Seller's law firm | By the firm, by email and signature | Usually not offered as a service; agreed case by case | Client account ledger and a closing statement |
| Paying agent | By the agent, through a portal: letter of transmittal, tax form, payment details | Withholding where required and year-end forms to holders | Payment report per holder, tax forms, portal history |
| Company itself | By the company | The company's responsibility, with its accountant | Bank statements and the company's books |
| Company payroll | Payroll records already on file | Withheld and reported as wages | Payslip and the year-end wage statement |
| Onchain payment router | None; shares are signed before payment | Not handled; the parties arrange it | Onchain transaction showing each recipient and amount |
The document at the centre of the paying agent's work is the letter of transmittal. A holder signs it to surrender their shares, confirm that they own them free of any claim, give payment instructions and, in many deals, accept the terms of the merger agreement including a release. In the United States the letter comes with a tax form: Form W-9 for a US person, a form of the W-8 series for a foreign person.
Cost is described here without figures, because each is negotiated or published by the provider. Direct wires cost bank fees and the legal time spent on the schedule. A law firm's payout work is normally billed with the transaction fees. A paying agent charges a fee quoted per deal, which depends on the number of holders and on whether it also holds an escrow. Payroll costs a special run with the company's provider, the company acting alone spends staff time, and an onchain router charges its own fee.
Why are shareholders often paid days or weeks after closing?
Shareholders are paid late because their file is incomplete, not because the money is slow. A holder who has not returned the letter of transmittal, the tax form or verified payment details cannot be paid, whatever method is used.
The evidence comes from the firms that do this work at scale. SRS Acquiom, a paying agent that publishes data on its own transactions, reports that 99% of its shareholder payments are paid within 24 hours, on the condition that the holder's paperwork is complete and the payment account is funded.
The usual causes, in the order a finance lead meets them:
- The letter of transmittal has not come back. Former employees, early angels and heirs of a deceased holder often learn of the sale from the letter itself and take time to answer.
- The tax form is missing or wrong. A US payer who has no valid taxpayer identification number for a payee must apply backup withholding, which the Internal Revenue Service sets at 24% of the payment.
- The payment details are not verified. Bank details sent by email are checked by a call to a known number before a large wire is released. This control adds a day or two for each holder who is hard to reach.
- The holder is an entity, or the record is out of date. A fund or a trust must show who is authorised to sign; a lost certificate or a changed name needs a supporting document.
- The holder cannot be found. The money waits until the holder is located, and after a period set by law unclaimed amounts may have to be handed to the state.
Every method pays the ready holders quickly. The methods differ on what happens to the holders who are not ready.
When is a paying agent the right choice?
A paying agent is the right choice when the holders are too many, too scattered or too varied for the lawyers to collect every file before closing. Its work is to gather documents from hundreds of holders, withhold tax where the law requires it, hold back escrow amounts and release them later to the same list of people.
Nothing else on the list does those three things together. The agent runs a portal where each holder signs the letter of transmittal, completes the tax form and enters bank details, often before closing so that payment can go out on the day. It tracks who has answered, chases those who have not, and pays by wire, domestic bank transfer or cheque. At year end it issues the tax forms, which in the United States means Form 1099-B for shareholder proceeds.
Its second strength appears months later. When an escrow or a holdback is released, or an earnout is paid, the same holders must be paid again in the same proportions. A paying agent that kept the register from closing runs the second distribution from the same file.
A paying agent has limits, and they are stated openly by the agents themselves. SRS Acquiom notes that most paying agents will not process payments treated as employee compensation, because they are not set up for employee withholding, payroll tax payments and wage reporting. Option payouts therefore go to the company's payroll or to a specialised employee payments administrator. For five holders who are all at the table, a paying agent is more structure than the job needs, although some sellers appoint one anyway for the tax reporting.
When does the law firm's client account or a direct wire from the buyer fit?
Direct wires from the buyer and payment through the seller's law firm both fit a short list of holders whose files are complete before closing. The difference between the two is whether the buyer accepts to send several wires or wants to send one.
With direct wires, no intermediary receives the price and each holder has their money on closing day. Buyers accept this for a few recipients and resist it for many: each wire is a line the buyer's treasury must set up, verify and release, and many buyers want their obligation discharged by one payment to one account named in the agreement.
The law firm's client account answers that. The buyer sends one wire; the firm, which already holds the signed allocation schedule and knows the holders, pays each of them. Client accounts are regulated: the money is kept apart from the firm's own funds and recorded in a ledger for each matter.
A law firm's limits are of scale and scope. Many firms do not offer tax withholding or year-end reporting on these payments, and a firm may decline to hold money for holders it does not represent or cannot identify. For a short list, the law firm is the natural choice because it is already in the room.
When should the company or its payroll make the payments?
The company should make the payments itself when it is the seller, as in an asset sale, and its payroll should pay any amount that counts as employee compensation, in every kind of sale. Payroll is a complement to the other methods, not an alternative to them.
In an asset sale the buyer pays the company, not the shareholders. The money reaches shareholders in a second step, by a dividend, a distribution or a liquidation, decided under company law and paid from the company's bank account. Its finance lead then needs a board-approved allocation, verified bank details for each holder, and its accountant's view on any tax to withhold on the distribution, which depends on the country and on the holder.
In a share sale or a merger, the company, which belongs to the buyer after closing, still pays one category: compensation. SRS Acquiom's guidance on the subject lists what is generally treated as compensation in the United States: options cashed out or exercised at closing, restricted stock for which no early-taxation election was filed, and management bonus payments tied to the deal. These are generally reported on the year-end wage statement, Form W-2, and this holds even when the person is no longer an employee at the time of payment. Shareholder proceeds, by contrast, are generally reported on Form 1099-B.
The practical consequence is a split in the funds flow. The buyer or the paying agent sends the total of all compensation payments to the company, and the company's payroll pays each person net of withholding in a regular or special run. The same guidance points out that compensation generally carries employer payroll taxes while capital gains do not, so the agreement should say who bears that employer cost.
Where does an onchain payment router fit, and where does it not?
An onchain payment router fits a sale with a small number of holders who can all receive onchain and a buyer who can pay onchain. It does not fit a long list of holders, a deal that needs documents collected, or any amount that must be held back.
Shaka is one such router. One payment comes in and every party is paid their share at the same moment, in one transaction; Shaka routes the payment and never holds the funds. Each holder's share is set as a percentage of the deal, and each recipient can sign their share before the buyer pays, which costs them nothing. The buyer pays once, through a payment link. Because the destinations are fixed and signed before the payment, the money cannot be redirected at the last minute. The payment is final, every party can see that the others were paid, and the record of who was paid what stays available onchain and can be kept for the file.
The limits are as plain. A deal on Shaka has at most 20 recipients. It is not an escrow service, a payroll tool, a bank or a paying agent: it collects no letter of transmittal and no tax form, withholds no tax, issues no year-end form and holds nothing back for later release. A sale that needs any of those needs the professionals who provide them, alongside or instead. A single holder who cannot receive onchain sends the whole distribution back to one of the other methods.
What does one sale look like under each method?
On the same sale, the six routes produce between two and seven transfers, and the party holding the price ranges from nobody to a paying agent. The example below is a worked illustration; its timings are illustrative, not measured.
The assumptions: a company is sold in a share sale for $5,000,000 net of transaction expenses, all paid at closing with no amount held back. There are five recipients. Founder A holds 45% and receives $2,250,000. Founder B holds 25% and receives $1,250,000. An angel investor holds 15% and receives $750,000. An employee whose vested options are cashed out is entitled to 10%, or $500,000 after the exercise price, and that amount is compensation that must pass through payroll. An investor living abroad holds 5% and receives $250,000 by international wire. The four shareholder payments total $4,500,000, and with the $500,000 of compensation the five amounts sum to $5,000,000.
| Method | Transfers needed | Who holds the money | When each holder is paid |
|---|---|---|---|
| Buyer wires each holder | 6: four to shareholders, one to the company, one payroll payment | Nobody for $4,500,000; the company for $500,000 | Three on closing day; the investor abroad 1 to 3 business days later; the employee at the payroll run |
| Seller's law firm | 7: one in, four out, one to the company, one payroll payment | The firm's client account for $5,000,000, then the company for $500,000 | Closing day or the next business day; abroad a few days more; the employee at the payroll run |
| Paying agent | 7: one in, four out, one to the company, one payroll payment | The agent's account for $5,000,000, then the company for $500,000 | Closing day for each complete file; the employee at the payroll run |
| Company itself | 6: one in, four out, one payroll payment | The company's bank account for $5,000,000 | When the finance lead releases each wire; the employee at the payroll run |
| Onchain payment router | 2: one payment that pays five recipients, one payroll payment | Nobody for $4,500,000; the company for $500,000 | All four shareholders and the company at the moment the buyer pays; the employee at the payroll run |
Three things stand out. First, payroll appears in every row: with one employee among the five, no single method does the whole job. Second, the investor abroad is the slow payment wherever a bank wire is used, because an international wire passes through correspondent banks. Third, the number of transfers says little about effort: the paying agent row has seven and asks the least of the finance lead, who makes only the payroll payment.
Change one assumption to one hundred and eighty holders, forty of them former employees, and direct wires and the onchain router leave the comparison at once: what remains is a paying agent for the shareholders and payroll for the option holders.
What must be settled before closing so that the payout is clean?
A clean payout depends on three things being finished before closing day: an allocation schedule that every party has agreed and signed, payment details verified for each holder, and a valid tax form from each holder. A holder missing any one of the three is the holder who will be paid late.
- Freeze the list of holdersReconcile the share register and the option ledger with the cap table: names as they appear on legal documents, number and class of shares, options vested at closing.
- Agree and sign the allocation scheduleOne table gives each holder's amount at closing and their percentage of anything paid later. It is attached to the purchase agreement and approved by the parties, so that no amount is argued over once the money has moved.
- Separate compensation from shareholder proceedsMark every line that must go through payroll. Agree with the buyer who funds the employer's payroll taxes and on which payroll run the amounts will be paid.
- Collect the documents earlySend letters of transmittal and tax forms before closing where the agreement allows it, not after.
- Verify every payment instructionConfirm bank details by a call to a number already known, never to one given in the same message as the details. For holders abroad, obtain the full international details and the name of the account holder exactly as the bank records it.
- Decide what happens to the holders who are not readyName who holds their money, for how long, and who keeps chasing them. This decision, more than any other, points to the method.
The allocation schedule deserves the most care because every method executes it without questioning it. An error in the schedule is paid out as faithfully as a correct line, and recovering money from a holder who received too much is slow and sometimes impossible.
How do you choose a method for your sale?
The choice depends on four facts about the holders: how many they are, whether any payment is compensation, whether money will be paid again later, and whether every file can be completed before closing. Read against those facts, the decision is usually short.
- Five to ten holders, all known, all files complete, nothing held back. Direct wires from the buyer if the buyer agrees to send them; otherwise one wire to the seller's law firm, which pays out.
- The company is the seller. The company distributes after the corporate approvals, with its accountant on the tax treatment.
- Any employee or former employee with options or a deal bonus. Payroll for those lines, whatever method pays the shareholders.
- A few dozen holders or more, or holders nobody has spoken to in years. A paying agent, appointed early enough to collect documents before closing.
- An escrow, a holdback or an earnout to be paid later to the same holders. A paying agent, often the same institution as the escrow agent, so that the later release runs from the register built at closing.
- Holders in several countries. A paying agent or a law firm able to pay abroad, and tax advice on each holder's forms before closing.
- A small group, twenty at most, all able to receive onchain, with a buyer paying onchain and nothing to hold back. An onchain payment router, with documents and tax handled separately by the parties' advisors.
One situation overrides the list. If one holder's file will not be ready by closing, choose a method in which a named party can hold that holder's money without delaying the others: that is what the client account and the paying agent are for.
