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What to do if your company has a tender offer?

10min read

One big compensation difference between working at a private startup and a publicly traded company is that, as part of the former, you will (generally) not have access to ongoing liquidity.

This means that even though you will likely receive some form of equity (either stock options or grants), and are ~technically~ an owner of the business, you will not have the ability to “cash out” as you please.

There is no completely liquid, real-time market for private startups. Private companies do not share their financials publicly. They also put in place trade restrictions to prevent shareholders from trading as they please. One reason they do this is to incentivize employees to work harder in hopes of a future liquidity event (like an IPO). Even if they did allow and encourage ongoing secondary sales, most companies would not resemble compelling investment opportunities.

All of the above being said, some companies—especially ones that are entering the Ds, Es, and Fs of the startup funding rounds—are beginning to make liquidity available to employees in a more ongoing fashion while the company is still private. Companies like SpaceX, Notion, and Stripe are leading this charge.

These companies do this for a few reasons but one big one is as a perk to employees. To say, “hey, we are still a private company with a long way to go but we want to give you a little breathing air so you can cash out a percentage of your shares now.”

Other reasons companies may do this include: preventing employees’ stock options from expiring (this is worthy of a whole separate essay, but just know that sometimes companies will offer liquidity of sorts so that employees can afford to exercise their stock options before they expire). Another nuanced tricky part of providing a tender offer is that sometimes doing so will actually trigger the “double trigger RSUs” to activate their second trigger. This results in employees owing taxes at tax time (or at least the need to elect to adjust their withholdings to cover taxes earlier) before the company is fully liquid. This is a tricky situation that as an employee you will want to be aware of so you can avoid disaster.

Employers giving liquidity to employees often comes in the form of something called a tender offer. A tender offer is more formally defined as when your company (sometimes sponsored by third-party investors) offers to buy common (or even preferred) shares from you for cash at some specified price.

A tender offer may sound like this: “Hey employee who has been here for more than 2 years, we are offering to purchase up to 5% of your shares for $20/share. It is up to you if you want to participate—but let us know within 2 weeks.”

You—the startup employee (or sometimes as an investor you can participate in these sort of offerings)—must then figure out what you want to do. Most of the time, the decision will seem quite obvious, but spending a bit of extra time to understand the details will help set you up for success.

Here are a few things to consider:

Disclaimer: The below is not financial or tax advice. Please speak with a professional. We may be able to help at Compound, where we provide everything you need to manage your finances (advice, tracking, investments, taxes, and more).

  1. Understand the context: Recognize that in a downmarket, most companies will not be doing tender offers. This is because demand in the private markets has slowed down. This is not to say that no companies will do tender offers or that it’s not possible to sell some of your shares on some form of a secondary market. But it is to say that you should be grateful if your company is doing a tender offer. Try to figure out why they are doing a tender offer in the first place, but it’s likely because the company is in a solid enough position that they can go out of their way to do something great for employees.
  2. Start by collecting data: Understand the terms of the tender offer. This includes understanding who the offer is being made to (sometimes it will only be available to early employees, sometimes only to active employees, etc.), what type of securities are eligible (can you sell shares? can you sell grants? what is available?), and what the constraints are (how much can you sell? what is the price? who is the buyer?)?
  3. Define your goals: Before actually building any models—try to figure out what your goals are. What are you going to do with the money? How would money improve your life today? What do you need money for? What do you want money for? Be as specific as possible—think about your family, your legacy, and your priorities. We suggest that  you write things down and talk to your partner (if you have one) during this process. The goal definition part is essential to minimizing regret because we can measure success more objectively—are we able to achieve our goals in the future? Does this event help or hurt those odds?
  4. Think about the upside: Once you have the foundation, you should build yourself a cash flow model that compares the pros and cons of participating in the tender offer (i.e. selling a portion of your shares) with various permutations (e.g. selling 10%, selling 5%, and so on). A tricky part of this is trying to guesstimate what your stock could be worth in the future. This will help you figure out the tradeoff of selling some now versus waiting to sell it in the future. This is a probabilistic exercise—you are basically guaranteed to not be precise in this evaluation—but it is worth trying to think deeply around “what could this be worth in the future?” Some tools to help could include trying to figure out what public competitors are worth and then asking yourself: “why could we win and over what time horizon is this likely?” You may not be able to answer these questions alone—consider asking your manager or leadership team.

Calculate your pre and post tax implications in the scenarios so you understand the precise implications of all of the decisions you may make.

Depending on the type of equity you own, you may be taxed differently. Understanding the taxes are essential to calculating your take-home as prescribed above. There are some particularly important keywords to understand as it pertains to the tax implications of participating in a tender offer:

  1. Long term capital gains: The benefit of long term capital gains depends, but could be up to 17% "savings.” This is a tax applied to assets sold that were held for more than a year (and in the case of ISOs (incentive stock options), they needed to be granted at least 2 years ago).
  2. Cashless exercise: When you buy your stock options and sell the shares in the same day. You would do this if you wanted to participate in a tender offer but have not yet exercised any of your stock options. To participate, you will need to buy your options and sell them in the same day. The benefit to this is you get liquidity but the downside is that you get a “worse” tax treatment (in this case, worse is being compared to getting long term capital gains as defined above).
  3. Qualified small business stock tax exemption (QSBS): This is a tax exemption that—if you qualify—can mean up to $10M+ in tax-free capital gains. One of the many requirements to getting QSBS is holding onto your stock (not options—STOCK or already exercised options) for at least five years. Sometimes, when presented with a tender offer, you will have to figure out if it’s worth voiding QSBS in order to get liquidity today or instead risk it to try to save on taxes in the future.

One reminder that timing the tax game is not simple and can lead to mistakes.

For example, you could have not sold your shares in 2020 because you were waiting for long term capital gains but now, because the market has changed, you cannot even sell your shares at all. Always come back to your priorities.

  1. We highly suggest you work with a professional as many of the tax nuances will be complicated. We can help you do this at Compound.
  2. Once you have run the above analyses, it is time to make a decision. Directionally often matters more than precision here (in terms of making the decision, but precision does matter a lot for calculating your taxes—make sure you do that correctly). Once you have a decision in your head, force yourself to write a memo. The memo should include your thought process around your decision. Remember that not making a decision is also a decision. Write about things like key pros and cons, risks, and feelings.
In short, the key takeaway is to think deeply and logically about the decision you make regarding a tender offer. Don't try to make a knee jerk reaction and take the money offered immediately—make sure you consider the implications and understand the tax implications before selling any of your shares. It is also important to remember that you can always seek professional help or advice from someone. We can help at Compound