Why do private companies run liquidity events?


Companies are staying private longer: 

  • Amazon went public when it was 3 years old.
  • Workday was 7 years old.
  • Uber was 10 years old.
  • Airbnb is 11 years old and still private.

There are lots of reasons companies stay private—but the longer a company delays going public, the more early investors and employees demand liquidity. Savvy employees and investors are starting to choose companies based on if and when companies will hold liquidity events. At Carta, we believe prospective employees will soon ask about tender offers and other liquidity options when considering job offers, especially as companies stay private longer.

There are many ways for private companies to offer employees and investors liquidity before going public. One of the most common ways is a tender offer.

What is a tender offer?

A tender offer is a structured, company-sponsored liquidity event. A tender offer typically involves multiple sellers who sell their shares either to an investor or back to the company. The company arranges buyers, chooses a trading price, and prepares disclosures and transaction documents for buyers and sellers. When the company purchases the shares, it’s commonly called a “share buyback” and when an investor purchases shares it’s usually called an “investor purchase.”

Tender offers are great for sellers because they can turn their shares into cash. Tender offers are great for companies as well, because they help companies attract and retain talent, and manage dilution during fundraising.

Attract and retain talent

It’s hard to hire in tech. When an employee compares offers, it can be difficult to know which offer is better. There are a lot of unknowns outside of salary and benefits, especially when it comes to how much your equity could be worth at a private company. 

When an employee has two job offers that include equity—one from a private company and one from a public company—it’s much easier to determine the value of the public company equity. Anyone can look up the value of public company shares. Plus, the public stock is a liquid asset—when those shares vest, that equity is as good as cash. Private companies who offer liquidity can better compete with public companies for talent.

If you’re competing for talent with other private companies, regular company-sponsored liquidity events can make your company more appealing to applicants. They may also encourage current employees to stay at your company longer.

The bottom line: Running regular tender offers can help attract new talent and encourage employees to stay with you longer.

Manage dilution during fundraising

Current investors, founders, and employees of private companies have a common concern about fundraising—dilution. When raising a new round of financing, there’s a balance between issuing new shares and diluting current shareholders. 

If your business has enough cash, there’s a trick. A tender offer can be an anti-dilution tool—meaning you can leverage tender offers as a way to bring on new investors or allow current investors to increase their holdings without diluting your shareholders. Your investors and employees will also get an opportunity to turn some of their shares into cash.  

The bottom line: It’s a win-win. Work with new investors, control dilution, and give current investors and employees liquidity.

Carta makes tender offers easy

When your cap table is on Carta, setting up your Carta tender offer is fast and simple. Unlike with other tender offer providers, there’s no onboarding to a new system. Carta’s experienced team facilitates the transaction for you and your shareholders. We collect participants’ orders on our platform, settle the transaction, and automatically update your cap table when it’s done. 

Reach out to our liquidity experts to learn how we can help you with your next tender offer.


DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. 

 

Subscribe

Stay up to date with monthly blog highlights

Related articles


What is a 409A valuation?

Learn everything you need to know about section 409A of the internal revenue code. From what is a 409A valuation to 409A methodologies and process.

Broken cap tables

Cap tables are a necessary evil for every startup founder, CEO or CFO. Excel spreadsheets are usually riddled with mistakes. Carta is changing that.

Analyzing the gender equity gap

Much has been said about the gender pay gap, but most publicly available research focuses on only one part of compensation: salary. But in startups, wealth is created through equity ownership on the cap table.

© 2019 ESHARES, INC. DBA CARTA, INC.