Understanding tax implications of tender offers


Why run a private tender offer?

Venture funding has increased substantially over the last five years, making it easier for companies to raise money and delay an IPO and exit. The appetite for liquidity alternatives is growing, and tender offers have become a popular mechanism. A private tender offer is an episodic event in which eligible sellers (as determined by the company and/or buyer) are able to sell shares for a minimum of 20 business days.

Tender offer benefits include:

  1. Providing founders, employees, and company investors with a way 
to sell a portion of their vested or owned equity for significant life events or to realize returns
  2. Allowing companies to recruit and retain high-quality talent in a competitive hiring landscape
  3. Providing outside investors with additional ownership without 
the dilutive effects of a primary financing
  4. Reducing the number of owners in a company

Tender offer structures

Before deciding how to structure a tender offer, companies need to be aware of how the tender will affect the participants from a tax perspective. Understanding the tax consequences of tender offers begins with understanding the relationship between the transaction price, the most recent 409A valuation, the buyer of the stock, and the frequency of the transactions.

Depending on the aforementioned points, the proceeds from a liquidity transaction may be deemed as compensation paid by the company and require 
all or a portion of the proceeds to be reported as wages.

Tax implications: sellers and companies

The taxation and reporting of tender offers changes significantly when there is a compensatory transaction. In aggregate, the sellers will pay more taxes due to a portion of their income being treated as wages rather than capital gains. However, the increase in effective tax rate will change based on the type of equity being sold, the relationship between the sellers and the company, and the holding period of the stock.

The company’s tax considerations are also affected by compensatory tender offers. The company will be responsible for the employer portion of employment taxes on the income reported as wages, but the company would generally be entitled to a deduction for the amount reported to employees as income. This deduction could be valuable to the company depending on the size and usability of the losses.

Companies that report wages to employees are responsible for tax withholding where necessary. Carta makes money movement easy by depositing the necessary withholding amounts directly into the company’s bank account during the tender offer closing process.

How Carta helps

Carta provides clients with the ability to run structured liquidity programs. Our team of dedicated account managers assist companies of all sizes with the tender offer process through our platform.

Schedule a time to discuss

If you’d like to have a discussion about structuring a private tender offer or liquidity transaction for your team, or want the full white paper to better understand the tax consequences associated with tender offers, you can book a call with me here.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Please consult your attorney for legal advice, or your accountant for tax advice.

Related articles


What to know about Tender Offers

Private companies are increasingly engaging in tender offers. Carta answers the most common questions for anyone running or participating in a tender.

SF CFO Summit: expert advice on secondaries

Larry Albukerk, Adam Kosmicki, Justin Lau and Ken Wallace discuss the process of tender offers. They give expert and invaluable advice for startups.

Why you should be transparent about employee equity

Carta works to explain equity to each of our employees. We encourage other startups to do the same; creating a culture of loyalty, trust and support.

eShares, Inc. DBA Carta, Inc. is a transfer agent registered with the U.S. Securities and Exchange Commission. The services and information described in this communication are provided to you “as is” and “as available” without warranties of any kind, expressed, implied or otherwise, including but not limited to all warranties of merchantability, fitness for a particular purpose, or non-infringement. Neither eShares, Inc. DBA Carta, Inc. nor any of its affiliates will be liable for any damages, including without limitation direct, indirect, special, punitive or consequential damages, caused in any way or arising from the use of the services or reliance upon the information provided in this communication or in connection with any failure of performance, error, omission, interruption, defect, delay in operation or transmission, computer virus or line or system failure. Transfer Agent services for DTC-eligible registered companies provided by Philadelphia Stock Transfer, a Carta affiliate. Carta Securities LLC is a broker-dealer and a member of FINRA and SIPC. Contact: eShares, Inc. DBA Carta, Inc., 195 Page Mill Road, Suite 101, Palo Alto, CA 94306.

© 2018 ESHARES, INC. DBA CARTA, INC.