Tender Offer
Key things to know/consider/prepare for when your company facilitates a tender offer
Pre-Read: Key Questions This Article Answers
As an employee, what are the key decisions I need to make and risks to consider when my company is facilitating a tender offer?
Should I participate in my company's tender offer? What are the major pros/cons to consider?
What does it mean when a tender offer occurs at my company, how does it work, and are there any restrictions?
What It Means When Your Company Facilitates a Tender Offer
A tender offer is when a company allows employees, and sometimes ex-employees and investors, to sell their shares at a set price (most frequently sold to outside investors; but sometimes it's the company repurchasing the shares). It provides a way for employees with stock and/or vested options to access liquidity prior to an IPO or acquisition.
Tender offers tend to only have a few steps: (1) Your company agrees to facilitate a tender offer (typically in partnership with a 3rd party buyer like a VC), (2) the tender is announced internally; including key details like timeline, price of sale, and any selling restrictions, (3) eligible individuals decide if they want to participate or not; if they do, they notify the company and complete the necessary paperwork, (4) the deal is consummated, and participating individuals are paid their respective proceeds.
Note: A tender offer is frequently facilitated by a secondary market exchange (i.e. Forge, Nasdaq Private Markets, Carta).
Why Do Companies Facilitate Tender Offers
Privately traded companies frequently have a number of motivating reasons for facilitating a tender offer. The primary three reasons are:
To provide liquidity for employees. Stock options in a private company are “paper money only” until an IPO or acquisition. A tender offer allows employees to turn their vested stock options (or purchased shares) into cash, which they can use to diversify and/or meet other financial goals (e.g. buying a home).
To meet excess demand from investors. If a funding round is oversubscribed, a tender offer allows investors (new or existing) to buy more shares in the company (via purchasing from existing shareholders in a tender offer, as compared to buying newly issued shares from the company directly as part of a capital raise).
To reduce shareholder dilution (if the company is the buyer). In the less common circumstances when the company is the purchaser, a tender offer allows it to buy back it's own shares, which reduces the total share count (limiting or improving the dilution that occurs as shares are issued over time in capital raises).
How a Tender Offer Impacts Your Stock Comp
In most circumstances, a tender offer will not have an impact on your stock comp. The only potential exception to this is if the tender offer is considered a liquidity event for double-trigger RSUs (which is very rare, and nearly all companies will take steps to avoid that).
Key Decisions, Considerations, and Risks
Tender Offer Terms and Restrictions
Tender offers have a number of components to them. If, and how much, you can sell in the tender offer (if you desire to sell any at all) likely depends on the following key items:
Who can sell (eligibility). Your company decides which individuals are allowed to participate. In most cases all existing employees with vested options are allowed to participate. The bigger question is whether former employees, and/or existing investors can participate in the deal as well.
How much can you sell (if you are eligible). Your company may have a restriction as to the maximum number of shares you can sell (e.g. 10%).
Will the tender offer result in meeting “double trigger” requirements of RSUs. This is usually something companies try to avoid, but it can happen. And if it does, it can have material tax consequences.
Transaction Price. What price per share is the tender deal being offered at?
Transaction Timeline. When will the sale be finalized.
Taxation. (See below)
Should You Participate/Sell in the Tender Offer?
The most important decision you need to make is whether participating in the tender offer makes sense for your financial situation. There is a lot to consider to come to an answer here (and where partnering with an advisor can help). But at a high level, key items to assess are:
What are your financial goals? How would tender offer proceeds impact your financial desires, goals, and needs?
Do you want/need money now? If so, the liquidity could be very valuable to you. When a company is privately traded, you never know if a future selling opportunity will occur again; nor if one does occur, when that will be and at what price.
Do you believe the offer price fair? At 30-40 Wealth we’ve seen some tender offers that feel fair, and some that don’t. That said, it’s almost always subjective and in most cases really hard to determine. To help think this though, we recommend reading:
If You Participate, What Shares/Options/Tax-Lot(s) Should You Sell?
Let’s say you’ve decided to sell 10% of your shares in a tender offer. The next question = which shares should you sell? In some cases this is pretty straight forward (e.g. you have one NSO grant and have never exercised before; so you only have one choice).
But if you have an alphabet soup of stock grants (RSAs, NSOs, ISOs, RSUs), and have exercised at least a portion of your option grants, there is a lot to consider and optimize for. Each individuals situation is different, but some key things to consider are:
How will the tender offer be taxed (e.g. is it Compensatory)? For more details on tax planning, see below
Do you have any shares that will qualify for QSBS when you sell? Or do you have any shares that will qualify for QSBS in the future if you continue to hold them?
If you have exercised ISOs, have the shares met the requirements for a qualifying disposition
If you have exercised NSOs, have the shares been held for 1 year (in which case gains since the purchase will likely be taxed as long-term-capital-gains)?
Strategic Tax Planning
With any liquidity event, a large number of tax planning opportunities exist. We've dedicated a section of this knowledge base site to detail 50+ tax strategies that you may consider, and highly recommend that you visit it as you develop your holistic plan and tax strategy.
Stock Comp Tax Planning Guide: 50+ Tax Strategies
That said, to try to be helpful, a few key items to consider are:
If you exercise options and sell shares in the same transaction, you’ll likely pay ordinary income tax rates on any gain. Note: this could push you into a higher tax bracket for the year. For more details see NSO Taxation and/or ISO Taxation.
If you sell shares you already own, you’ll likely pay capital gains taxes on any increase in value. The rates depend on whether you’ve held shares for over a year (long-term) or less (short-term). Long-term gains have lower tax rates (unless the tender is Compensatory; see below). For more details see Hold For 1 Year (Long Term Capital Gains)
If you sell ISO-acquired shares, make sure you consider if the sale will meet all the requirements of a qualifying disposition (or not). If you are exercising and selling ISOs in the same tender offer transaction, you'll pay ordinary income and/or short-term capital gains instead of long term capital gains. For more details see ISO Taxation.
Important Weird Nuance: "Compensatory" tender offers: If the tender offer deal is classified as “Compensatory”, watch out! The gains above your company’s 409a valuation are likely to be taxed as ordinary income, even if you are selling shares you've owned for years (yep, really frustrating!). Your company should be able to provide you with this information (but make sure you ask)!
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