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Understanding Tender Offers: A Guide for Employees with Equity Compensation

As a private company employee with equity compensation, you may encounter a tender offer - an opportunity to sell your shares before the company goes public. This comprehensive guide will help you understand tender offers and make informed decisions about participating.

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What is a Tender Offer?

A tender offer is a structured opportunity for private company shareholders (including employees with equity) to sell some or all of their shares to specified buyers. These buyers could be:

  • The company itself (through a stock buyback program)
  • External investors (venture capital firms, private equity firms, or other institutional investors)
  • A combination of both

Unlike the public market where you can sell shares any time, private company shares typically have limited liquidity opportunities. Tender offers provide a structured way to get liquidity while the company remains private.

Key Components of a Tender Offer

Purchase Price: The tender offer will specify a fixed price per share. This price is typically:

  • Determined through negotiation between the company and potential buyers
  • Often based on the company's most recent valuation or funding round
  • Sometimes offered at a discount to reflect the shares' illiquid nature
  • Uniform for all participating shareholders in the same class of shares

For example, if your company's last funding round valued shares at $20, the tender offer might be at $18 per share to reflect the illiquidity discount.

Participation Limits: Most tender offers come with specific limits:

  • Maximum number of shares that can be sold company-wide
  • Individual participation caps (e.g., up to 20% of your vested shares)
  • Minimum holding requirements (e.g., must retain at least 50% of your vested shares)

Example: You have 10,000 vested shares, and the tender offer allows selling up to 20% of holdings. You could sell up to 2,000 shares while retaining 8,000 shares.

Eligibility Requirements: Common eligibility criteria include:

  • Only vested shares are eligible
  • Minimum employment tenure
  • Specific employee levels or departments
  • Good standing with the company

For instance, a tender offer might require that participants have been employed for at least two years and only allow sales of shares that have been vested for at least six months.

Tax Implications

The tax treatment of tender offer proceeds depends on several factors:

Qualified vs. Non-Qualified Stock Options (ISOs vs. NSOs)

  • For exercised ISOs: If you've held the shares for more than 1 year post-exercise and 2 years post-grant, gains are taxed as long-term capital gains
  • For NSOs: Proceeds are typically taxed as ordinary income

Example: You exercise 1,000 ISOs at $5 per share ($5,000 total) and sell them in a tender offer two years later at $25 per share ($25,000 total):

  • If qualifying holding periods are met: $20,000 gain taxed at long-term capital gains rates
  • If not: $20,000 taxed as ordinary income

RSUs and Restricted Stock

  • RSU sales are typically taxed as ordinary income
  • Restricted stock sales may qualify for capital gains treatment if a Section 83(b) election was previously filed
Decision Factors

When evaluating whether to participate in a tender offer, consider:

Personal Financial Planning

Company Outlook

  • Company's financial health and growth trajectory
  • Potential timeline to IPO or acquisition
  • Competitive landscape and market conditions

Terms of the Offer

  • Price relative to recent valuations
  • Any restrictions on future sales
  • Pro-rata allocation if oversubscribed
Example Scenario

Let's walk through a complete example:

Sarah is a software engineer at PrivateCo with the following equity position:

  • 20,000 vested ISOs (exercise price: $2)
  • 5,000 vested RSUs
  • Current fair market value: $15 per share

PrivateCo announces a tender offer:

  • Purchase price: $14 per share
  • Employees can sell up to 25% of vested holdings
  • Minimum 2-year employment requirement
  • Must retain at least 50% of total vested equity

Sarah's Analysis:

Maximum eligible shares:

  • ISOs: 5,000 shares (25% of 20,000)
  • RSUs: 1,250 shares (25% of 5,000)

Financial impact:

  • ISO sale proceeds: $70,000 (5,000 × $14)
  • RSU sale proceeds: $17,500 (1,250 × $14)
  • Total potential proceeds: $87,500

Tax considerations:

  • ISO shares held over qualifying periods: $60,000 gain ($14 - $2 × 5,000) taxed at long-term capital gains rates
  • RSU proceeds: $17,500 taxed as ordinary income

Decision factors:

  • Needs $50,000 for home down payment
  • Company showing strong growth but IPO likely 2-3 years away
  • Desires some portfolio diversification

Final Decision:

Sarah decides to sell 3,571 ISO shares ($49,994 proceeds) for her down payment, maintaining significant upside exposure while meeting her immediate financial need.

Common Mistakes to Avoid
  • Failing to Consider Tax Impact: Don't focus solely on the gross proceeds. Calculate after-tax proceeds based on your specific situation and consult a tax advisor.
  • All-or-Nothing Thinking: You can usually participate partially. Consider selling only what you need for specific financial goals.
  • Ignoring Future Opportunities: Consider the company's trajectory and potential future liquidity events. Selling too much too early might mean missing out on greater upside.
  • Missing Deadlines: Tender offers have strict deadlines and documentation requirements. Mark key dates and submit all required paperwork early.
Steps to Participate

Review Offer Documents

  • Read all materials carefully
  • Note key dates and deadlines
  • Understand participation limits and eligibility requirements

Analyze Your Position

  • Calculate total eligible shares
  • Project tax implications
  • Consider personal financial needs

Seek Professional Advice

  • Consult tax advisor
  • Review with financial planner
  • Consider legal counsel for large transactions

Submit Documentation

  • Complete all required forms
  • Provide accurate banking information
  • Submit well before deadlines

Plan for Proceeds

  • Prepare for tax payments
  • Align with investment strategy
  • Consider immediate vs. long-term needs

Tender offers can provide valuable liquidity opportunities, but participation requires careful consideration of multiple factors. Take time to understand the terms, analyze your personal situation, and seek professional advice when needed. Remember that it's often not an all-or-nothing decision - you can usually participate partially to meet specific financial goals while maintaining upside exposure to your company's future growth.