What to do if your company has a tender offer?

A major difference in equity compensation between working at a private startup and a publicly traded company is that, in the former, you typically won’t have access to ongoing liquidity. While you may receive equity in the form of stock options or grants, and technically own a part of the business, you won’t be able to "cash out" at your convenience.

Private startups lack a fully liquid, real-time market. They don’t disclose their financials publicly and often impose trade restrictions to prevent shareholders from buying or selling freely. One reason for this is to motivate employees, offering the potential for a future liquidity event (like an IPO). Even if companies did permit secondary sales, most would not present compelling investment opportunities.

That said, some companies—particularly those in later funding rounds, such as Series D, E, and F—are starting to offer more ongoing liquidity options to employees while remaining private. Companies like SpaceX, Notion, and Stripe are at the forefront of this trend.

These companies do this for several reasons, but one key motivation is to offer a perk to employees. It’s a way of saying, “We’re still a private company with a long road ahead, but we want to give you some breathing room by allowing you to cash out a portion of your shares now.”

Other reasons companies may offer this liquidity include preventing employees’ stock options from expiring (which could warrant a whole separate discussion, but in short, some companies provide liquidity to help employees exercise their options before they expire). Additionally, a tender offer can sometimes trigger the activation of “double-trigger RSUs,” leading to employees incurring taxes earlier than expected. This may require them to adjust their withholdings to cover the taxes, even before the company is fully liquid. As an employee, it's important to be aware of this potential issue to avoid any unpleasant surprises.

Employers offering liquidity to employees often do so through what is known as a tender offer. A tender offer is when your company (sometimes facilitated by third-party investors) offers to buy your common (or even preferred) shares for cash at a specified price.

A tender offer might sound something like this: "Hey, employee who's been with us for over two years, we're offering to buy up to 5% of your shares for $20 per share. It's entirely up to you whether you want to participate, but please let us know within the next two weeks."

As a startup employee (or, in some cases, an investor who can participate in these offerings), you'll need to decide how to proceed. While the choice may often appear clear, taking some extra time to review the details will help you make a more informed decision and set you up for success.

Here are a few things to consider:

Disclaimer: The following is not financial or tax advice. Please consult with a professional. At Compound Planning, we offer comprehensive services to help you manage your finances, including advice, tracking, investments, taxes, and more.

1. Understand the context: In a down market, most companies typically avoid doing tender offers due to reduced demand in the private markets. While it’s still possible for some companies to offer tender offers or facilitate secondary market sales, you should appreciate it if your company is offering one. Take the time to understand why they’re doing it, but likely, it’s because the company is in a strong enough position to provide this opportunity and offer something valuable to employees.
2. Start by gathering the details: Understand the terms of the tender offer. This includes knowing who the offer is available to (e.g., early employees, active employees, etc.), which types of securities are eligible (can you sell shares, grants, or both?), and what the constraints are (how much can you sell, what is the price, and who is the buyer?).
3. Define your goals: Take time to clarify your goals before diving into any cash flow modeling. What will you do with the money? How would it improve your life today? What do you need money for, and what do you want it for? Be as specific as possible—consider your family, legacy, and priorities. We recommend writing things down and discussing them with your partner (if applicable). Defining goals is crucial for minimizing regret because it allows us to measure success more objectively—can we achieve our goals in the future? Does this event help or hinder those chances?
4. Think about the upside: After establishing your goals, create a cash flow model to compare the pros and cons of participating in the tender offer (i.e., selling a portion of your shares) under various scenarios (e.g., selling 10%, selling 5%, etc.). A challenging aspect of this is estimating what your stock might be worth in the future. This exercise helps you weigh the tradeoff between selling now versus holding for future gains. It's a probabilistic exercise—precision is unlikely—but it’s worth reflecting on "What could this be worth in the future?" To aid this process, consider researching public competitors and asking yourself, "Why could we outperform them, and over what timeline?" You may not have all the answers on your own—consulting with your manager or leadership team can provide valuable insights.

Calculate the pre- and post-tax implications for each scenario to fully understand the financial impact of the decisions you may make.

Depending on the type of equity you own, you may be taxed differently. Understanding these tax implications is crucial to calculating your take-home amount as outlined above. Here are some key terms to understand when it comes to the tax consequences of participating in a tender offer:

1. Long-term capital gains: The advantage of long-term capital gains can be significant, potentially up to a 17% tax "savings." This tax rate applies to assets sold after being held for more than a year (and, in the case of ISOs—Incentive Stock Options—they must have been granted at least two years ago).
2. Cashless exercise: This occurs when you buy your stock options and sell the shares on the same day. It's typically done if you want to participate in a tender offer but haven't yet exercised your stock options. The benefit is that it provides immediate liquidity, but the downside is that it triggers less favorable tax treatment compared to long-term capital gains, as described above.
3. Qualified Small Business Stock (QSBS) Tax Exemption: If you qualify, this tax exemption enables you to receive tax-free gains from the sale of the stock up to the greater of $15M or 10x the original investment. One of the key requirements to qualify for QSBS is holding the stock (not options—actual stock) for at least five years to qualify for 100% exclusion. You can learn more about QSBS here. When faced with a tender offer, you may need to decide whether it's worth sacrificing the QSBS exemption in exchange for liquidity today or if you should hold out to potentially save on taxes in the future.

Timing the tax game is not simple and can lead to costly mistakes.

For example, you might have held off on selling your shares in 2020, waiting for long-term capital gains, but now, due to market changes, you can't even sell them at all. Always return to your priorities when making these decisions.

1. We recommend working with a professional, as many of the tax nuances can be complex. At Compound Planning, we can help guide you through this process.
2. Once you've completed the analyses above, it's time to make a decision. Often, direction matters more than precision when making the decision (though precision is crucial for accurately calculating your taxes—make sure you get that right). Once you've decided, take the time to write a memo outlining your thought process. The memo should cover key pros and cons, risks, and your emotions surrounding the decision. Remember, not making a decision is still a decision.

Conclusion

The key takeaway is to think carefully and logically about your decision regarding a tender offer. Avoid making a knee-jerk reaction to take the money offered immediately—ensure you fully consider the implications and understand the tax consequences before selling any shares. It's also important to remember that you can always seek professional help or advice. We can assist you at Compound Planning.

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