What is a tender offer (and should I participate)?

For startup employees with stock options or company shares, “liquidity” is a magic word. Since it can take years for a startup to go public, employees often view stock options as “paper” wealth. A future investment but something that doesn’t have any tangible value yet. So, any situation that offers you the opportunity to cash out now can be exciting. These opportunities are often known as liquidity events.

When we think about liquidity events, we typically focus on IPOs or other exit scenarios. But tender offers are also liquidity events — and they’re becoming increasingly common among later-stage startups.

Here are a few key things to know about tender offers, including how they work and some considerations around whether to participate.‍

What is a tender offer?‍

A tender offer gives private company employees a chance to sell a certain number of shares at a fixed price during a specific time frame. The shares can be sold back to the company (known as an issuer buyback) or to outside investors (a third-party tender offer).

A tender offer is usually an exciting time for a startup. You and your colleagues have a chance to unlock the value of your options and shares, which means near-term goals — like buying a new car or paying off debt — could come into reach.

Tender offers commonly happen around the time of a fundraising round (including an IPO), as they enable a company to sell existing shares to investors instead of issuing new shares.

Some companies, especially later-stage firms (Series C or later) may offer tender programs on a regular basis, for example, once each year. Regular or one-off programs that happen outside of a fundraising round are usually designed to reward employees with a way to liquidate their options and/or shares.

It’s worth noting that a company’s 409A valuation (also known as fair market value) will typically go up when there’s a new investment round, including a tender offer. A 409A change is important because it influences your costs of exercising stock options: if it increases, so does your cost to exercise. ‍

Who can participate in a tender offer?‍

If you already own shares, the concept is pretty straightforward: You decide whether to sell shares at the specified price, and, if so, how many.

If you have unexercised, vested stock options, it’s likely that you can participate in the tender offer, depending on how your company structures the program. In some instances, you could buy, or exercise, your options and become a shareholder, then turn around and sell shares as part of the tender offer. This means you could convert your options to cash in fairly short order.

If your company allows it, you may even be able to complete a cashless exercise.

Normally, you’d need to send money to your company to cover the cost of exercising your options before you can sell them during a tender offer. That means you’re technically making two transactions: an exercise (buying your options), then selling them. With a cashless exercise, the cost to exercise will be deducted from your share sale proceeds.‍

How do tender offers work?‍

First, the company announces that it’s running a tender offer. Your company will provide key details, including:

• Who is eligible — For example, current and former employees
• How much you can sell — You typically can’t sell all your shares; limits are often around 10-25%
• How much you’ll receive per share — This could be the current 409A price, though oftentimes can be higher if a tender is happening concurrently with fundraising
• Timing — There will be a start date and deadline for submitting your decision about how many shares you wish to sell (if any); Under the rules set by the U.S. Securities and Exchange Commission (SEC) and according to the Securities Exchange Act of 1934, tender offers must be held open for at least 20 business days.

Your company will provide official documents spelling out all the terms and conditions as well as information about the company and its financials. Your company may also offer info sessions where you can ask questions and learn more about the process.

Once the deadline has passed, the company will tally up how many shares people indicated they want to tender.

In some cases, there is a minimum number of shares that must be met for the tender transaction to take place. For example, a group of investors led by SoftBank agreed to buy existing shares of Uber as part of a tender offer in 2017. If there weren’t enough interested sellers to reach a 14% stake in the company, the investors were able to walk away from the deal.

It’s also possible for a tender offer to be oversubscribed. A company could, for example, specify that it’s able to buy back 1,000 shares then receive sell orders for 1,500 shares. The company would have to allocate 1,000 shares across the orders. This is often done on a pro rata (proportional) basis.

It’s worth noting that any exercise of your vested stock options is likely irrevocable, regardless of whether your shares are purchased as part of the tender offer. So, if you exercise 100 options and intend to sell 100 shares as part of the tender, it’s possible that you could only end up being able to sell 80 shares — but you can’t rescind the exercise of 100 options.

If you end up selling shares, you’ll receive the proceeds soon after the transaction settles. ‍

What are the tax implications?‍

Whenever you exercise options and/or sell shares, you’ll probably be faced with a tax bill. How much you’ll owe is influenced by a lot of moving parts, including what kind of options you have and how long you’ve held the stock. To see what taxes you may owe, you can enter your details into our free Stock Option Tax Calculator.

If you participate in a tender offer, your company will likely withhold a portion of your proceeds to submit as taxes on your behalf. However, your company’s withholding may not be enough to cover your actual tax bill, so you could be responsible for paying the rest.‍

How should you decide whether to participate in a tender offer?‍

Deciding whether to participate in a tender offer — and to what extent — is a very personal decision. Everyone will weigh the relevant factors differently.

There are pros and cons to participation. On one hand, a tender offer allows you to tap into liquidity at that moment, reducing an element of uncertainty. You can convert a portion of your options or stocks into cash right now — no need to wait for an IPO or other exit scenario.

On the other hand, participating in a tender offer means forgoing any future potential upside for those shares. Assuming your company IPOs, or goes public, and it trades at a higher price than you sold it for during the tender offer, you’ll miss out.

Any time you’re thinking of selling options or shares, whether it’s part of a tender offer or otherwise, several considerations come into play, such as:

• The tax implications particular to your unique situation
• Your short- and long-term financial goals
• Your views on the trajectory of the company’s share price and your ability to assess its outlook objectively
• Your risk tolerance and need to diversify

If you're looking for more color on the topic, Vieje covered it at length in our February 2024 edition of Founders + Funders: Should I sell in a tender offer?

Because a tender offer will likely have a complex effect on your personal financial situation, it’s always best to consult with your financial advisor and/or tax professional when deciding whether to participate and to what extent.‍

If you’re interested in exercising your options or tapping into liquidity without giving away your upside, Secfi can help. Sign up for free to get full access to our tools and speak with an equity advisor.