For startup employees with stock options or company shares, a “liquidity event” can seem within sight but ever further out into the future. It can take years for a startup to go public, leaving employees with limited options to monetize equity they have built up.
As companies increasingly take longer to launch an IPO, a tender offer can be a valuable opportunity for tenured employees to take some risk off the table, diversify holdings, and monetize private company shares toward achieving personal financial goals.
Understanding Tender Offers
At its core, a tender offer for private company shares is a proposal from either the company itself or an external investor to purchase a specified number of shares at a designated price within a particular timeframe. Tender offers are typically subject to certain conditions, such as a minimum number of shares being tendered or approval by the company's board of directors.
When Do Companies Conduct Tender Offers?
Companies might conduct a tender offer for a number of reasons:
To Provide Liquidity to Shareholders: Private company shares can be difficult to sell, so a tender offer can provide a way for shareholders to cash out their investment.
To Simplify the Company's Capitalization Table: A tender offer can be used to buy back shares from certain shareholders, such as employees or early investors. This can simplify the company's ownership structure and make it easier to manage.
To Increase Ownership Concentration: A tender offer can be used by an investor or group of investors to increase their ownership stake in the company. This can give them more control over the company's operations and strategy.
To Take Control of the Company: A tender offer can be used by an investor or group of investors to acquire a controlling interest in the company. This would give them the ability to make changes to the company's management and strategy.
Tender offers have become a popular way to satisfy early investors and reward longtime employees. Some late-stage companies (e.g. Series C or later) may conduct tender offers on a regular basis to reward employees with a way to liquidate their options and/or shares.
How Tender Offers Work
When your company announces a tender offer, they will provide the following key information:
Who is eligible to participate (e.g. current and/or former employees, investors, etc.)
How much you are allowed to sell (typically, you are limited to selling 10% - 25% of your shares)
The offer price per share (may exceed the latest 409A price if the tender is concurrent with a fundraising round)
The duration of the offer (typically a 20-business-day window opens for sellers to evaluate the transaction details and decide whether to participate)
It is important to note that participating in a tender offer is entirely at the shareholder's discretion. Once the offer period expires, if the minimum number of shares have been tendered, the transaction proceeds; otherwise, the offer may be withdrawn or extended. If, on the other hand, a tender offer is oversubscribed, the company may proceed with the transaction on a pro rata (proportional) basis.
Financial Planning and Tax Considerations
If you are an employee of a company that is conducting a tender offer, there are a number of financial planning and tax considerations that you should keep in mind:
Tax Consequences of Selling Your Shares: When you sell your shares of private company stock, you will likely be subject to capital gains taxes. The amount of capital gains tax you owe will depend on your tax basis in the shares and the length of time you have held the shares.
Impact on Your Net Worth: Selling your shares to use toward short-term financial goals may have a significant impact on your net worth. If you are relying on your equity in the company for retirement or other long-term financial planning purposes, you will need to a plan to replace that equity.
Impact on Your Job: If you sell your shares, you may lose certain benefits that are tied to your ownership of equity, such as stock options or restricted stock units. You may also lose your right to vote on certain corporate matters.
How Should Employees Prepare for a Tender Offer?
Evaluate the Offer: Assess the fairness of the share price and the strategic implications of the tender offer on the company.
Align with Financial Goals: Ensure that participating in the tender offer aligns with your broader financial objectives and investment strategy.
Understand the Tax Implications: Engage with a tax advisor to navigate the tax implications and strategize accordingly.
Consult Your Employer: If you have any questions or concerns about the tender offer, speak with your employer. They may be able to provide information about the offer and how it may impact you.
Consider Professional Advice: Seek guidance from financial advisors to make informed and strategic decisions.
Prepare for the Future: Use the liquidity gained wisely, whether it's for achieving short-term financial goals or reinvesting for long-term prosperity.
Conclusion
Tender offers can be a complex topic, but it is important for employees of companies that are conducting tender offers to understand the terms of the offer and the potential financial and tax implications. By carefully considering your options and having a plan in place, you can make informed decisions about whether to tender your shares.
We recommend consulting financial and tax advisors with expertise in equity compensation planning. If you need help finding one, do not hesitate to reach out. We are here to help you find a trusted financial advisor that is right for you.