Tender Offers

A tender offer is a structured event where the company or third-party investors offer to buy your shares from you for cash at some prevailing price. Often this accompanies a financing round where additional money is coming into the company. However, some companies do tender offers out of their operating profits. Tender offers are tightly controlled, with set timeframes, prices, and many regulations to be followed.

Each tender offer has its own set of rules and it is important to understand the specifics of yours.

Tender Offer Details to Know

1. What is eligible to participate in the tender offer?

Your company may put various restrictions in place limiting who and how they can participate. For example, there will likely be restrictions on which shares are eligible and how many shares you can sell. Illustrative examples:

• Company A: only allows shares that have been exercised and held for 6 months to be eligible; and limits you to selling 10% of your eligible shares
• Company B: allows you to convert options into shares and then sell those shares in the same offer; and allows you sell 25% of eligible shares

In the example, Company B has more “generous” tender offer participation terms than Company A. The selection of terms will be driven by many factors, most significantly the amount of money available for buying shares, but also the company’s culture of ownership and its desire to reward employees and encourage retention.

2. Is this a one-off tender offer or part of a recurring series?
   

The tender may be a unique event, unlikely to be repeated, or your company may plan to make tender offers to employees on a regular basis. Your company should be able to tell you which one this is. If they don’t, you should plan for it as a one-time occurrence.

When they were first developing, tender offers were infrequent events driven by sporadic outside investor demand. However, as tender offers evolved, many companies have begun offering annual liquidity programs for employees where tender offers reliably occur each year.

Historically, tender offers were generally only available to employees of companies that had raised a Series C venture round or beyond. However, smaller companies are increasingly implementing limited tender offers as a standard recurring employee liquidity benefit. That said, the availability to participate in tender offers still varies widely between startup companies.

Tender Offer Positioning

For tender offer eligibility purposes, generally owning shares is better than owning options, and owning longer is better than shorter. This also applies to the tax implications of participating in a tender offer, as shares held over a year receive long term capital gains tax treatment. While vested options can be eligible, exercised shares are more frequently accepted. Further, some companies use time restrictions, where the shares must have been held longer than a given period to be eligible. Also as discussed in more detail later, the longer the shares have been held, the better the tax treatment.

So, should you participate in the tender offer? The answer obviously depends on many factors, but here are some important things to consider.

1. What is the actual amount of money you can realize from offering your shares?
2. What would you do with the money if you got it?
3. What is your “liquidity profile” and what other liquidity opportunities will you have?
4. What is your outlook for the company?

1) How much money can you realize?

If you are like most employees, you have some combination of unvested options, vested options, and exercised shares. If the tender offer is restricted to exercised shares, and then only 10-25% of those, and then taxes need to come out after that, the actual amount you can realize may be much smaller than you initially may think.

The decision process of whether or not to take a tender offer that could net you $25,000 is much different than one that could net you $1,250,000. It is important to size your goals to the funds that will be available.

2) What would you do with the proceeds if you got them?

You can use proceeds from the sale to diversify your personal portfolio, pay off debt, put in savings, as a down payment for a house, or many other uses. If you already have a specific plan to put the proceeds to work, your decision process will be much different than if you did not. But it is important to have a destination worked out for the money before selling into the tender. In aggregate, people who “blindly sell,” without a plan for the proceeds are more likely to end up unhappy about their decision.

3) What other liquidity will you have?

If you already have significant liquid assets outside of this company, your decision process will be much different than if you had no outside liquidity. Similarly, if this will be a rare event or a regular opportunity will also influence your choice. It can be easier to pass on a chance for liquidity now if you expect you’ll be getting another liquidity offer next year and the year after that. Conversely, if this looks like the last time you may be able to get liquidity for many years, your decision process should reflect that.

4) What is your outlook for the company?

This is simplified to either positive or negative. As an employee, it is difficult to get a comprehensive insight into every aspect of the company and its position in the marketplace. However, you certainly get enough information to have a binary positive or negative feeling on the company’s future. As long as you have a definite feeling one way or the other, the degree of the feeling doesn’t matter much for your tender offer strategy, only the direction.

Generally, you will want to align your strategy as follows:

Aligned Positive – Positive on company, acquiring more shares

Aligned Negative – Negative on company, reducing shares

However, some people are more comfortable with contrasting positions, creating a ‘mental hedge’ for their position.

Contrasted Positive – Positive on company, reducing shares

Contrasted Negative – Negative on company, acquiring more shares

Take proceeds in tender offer or not?

Is it better to take the proceeds or keep your money in your growing company?

To answer, you can segment the amount of money into three buckets. Then you can look at the reasons that it would make sense to sell in the tender offer for each of the buckets.

• Net proceeds $1,000,000+ = lifestyle changing money
• $100,000-$1,000,000 = to complete a lifestyle transaction (using mostly other funds)
• <$100,000 = exercise your remaining options for better tax treatment in future transactions

Net proceeds $1,000,000+ = lifestyle changing money

For someone with negligible outside assets, realizing net proceeds over $1 million can significantly and permanently alter their lifestyle. That is enough to impactfully diversify your portfolio, or to buy a house, or to fund a charitable endeavor, or some combination of these or many other things. Even (limited) splurging on some luxury items can be managed with that amount of liquidity. If you already have substantial liquid assets, it is still useful to explore the tender offer as part of a plan to improve the tax standing of your holdings. You will need to thoroughly assess your circumstances if presented with the opportunity to realize significant liquidity.

For most people, the first tender offer is not enough liquidity to live off forever. The typical employee seeing this offer probably still has 90%+ of their wealth tied to this company’s shares and its future performance. You may have the opportunity to get $2 million in the tender offer, but you will still have $12 million invested in the company, or whatever your numbers are. If you sell into the tender offer, you may miss out on valuable additional growth in the shares. If that $12 million turns into $50 million five years from now, that $2 million you cashed out now would have been worth over $8 million. Is getting liquid on $2 million today worth giving up the chance of getting three times as much or $6 million?

That is a difficult question, and ultimately everyone must answer it for themselves given their own circumstances. However, if you have $58 million in 5 years or $50 million in 5 years, your life in 5 years will not be that materially different. You will still be very rich and able to afford pretty much anything you want. The things you can’t afford (like primary ownership of an NBA team), you cannot afford by a very wide margin. But in the present, getting $2 million if you previously have never had much liquidity can be a big event. The life of a sub-$100,000 liquidity person and a $1,000,000+ liquidity person is pretty materially different. The per-dollar life changing capacity of your first liquid million is the highest of all the money you will make. Subsequent millions that follow provide you diminishing utility in improving your life. The jump to $1 million is biggest, going from $1 million to $2 million is also pretty big; going from $31 million to $32 million is not very big; $77 million liquid to $78 million liquid is probably not noticed at all.

$100,000-$1,000,000 = to complete a lifestyle transaction (using mostly other funds)

If the net proceeds are between $100,000 and $1 million, the reasons to take the tender offer change. This amount of money is not quite significant enough to accomplish many of the lifestyle change items listed above, at least, on its own. However, if you have outside funds available, and combining the proceeds from this tender offer plus the other funds allow you to accomplish something, then taking the tender makes sense.

As an example, if you already had a small house and you could sell your house and contribute those funds towards a new house, it might make sense to sell $300,000 in a tender offer to allow for the purchase of a more expensive, nicer, new house. The $300,000 may not be enough to fund a house on its own (highly geographically dependent obviously), but combined with the sale of your existing house, maybe you can make a life improving housing upgrade.

That said, especially if you think you will have future liquidity chances, it may make sense to wait on taking the first liquidity offered if you will only net in the $100,000 to $1 million range. To expand on the earlier example company, where the early employee’s $12 million turned into $50 million five years later, if a different employee only had the option to realize $200,000, that $200,000 would be $600,000 five years later. Tender taker would have $5,000,000 in the company after 5 years; not taking tender and holding shares would turn into $5,800,000. Again, the lifestyle difference between having $5.0 and $5.8 million is probably not very big. However, the lifestyle difference of having $125,000 liquid to $325,000 liquid is also not very big. If there is an impactful difference that you can realize with only $200,000 of liquidity, then you should probably take it. For most people in tech oriented American society, however, the amounts necessary to impactfully change their lifestyles tend to be closer to $1,000,000.

<$100,000 = exercise your remaining options for better tax treatment in future transactions

If the net proceeds are less than $100,000, you probably should not take the tender offer and instead stay invested in the company. It is not a great idea to take the tender offer proceeds and buy a boat. The exception to taking a smaller tender offer is if you are doing it to manage your liquidity profile and exercise options to get better tax treatment for future transactions. Managing your options and getting favorable tax treatment is the reason why you may participate in a tender offer even though you are very bullish on the company and want to acquire more shares. By selling some shares into the offering, you create cash which you can then use to exercise additional shares, so the tender serves as a vehicle for you to acquire more of your shares.

This theory also applies at the larger levels as well. You can sell into the tender to get cash to exercise options at the million-dollar level certainly. It is more common to occur at the <$100,000 level first though.

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