Tender offers

What is a tender offer?

A tender offer is a type of secondary transaction allowing shareholders to sell a certain amount of their company stock at a predetermined price per share. The buyer can be an individual investor, a group of investors, or the issuing company (in what’s known as a share buyback). 

For public companies, the price per share is usually higher than the current market value to incentivize shareholders to sell. For private company stock, the offer price is typically determined by the company and any investors participating in the transaction. In some cases, the offer price may be equal to the company’s most recent 409A valuation.

Given the nature of these transactions, tender offers are often subject to internal agreements, government regulations, and other applicable securities laws.

Private company tender offers

Since private company shares are not available on a public market, shareholders such as founders, employees, former employees, and early investors have limited opportunities to sell their shares. Private companies today are staying private for longer, meaning an exit event may be years down the line.

By allowing companies to provide a structured liquidity event for shareholders, tender offers have become a popular way to satisfy early investors and reward longtime employees. These transactions benefit multiple participants:

• Sellers can monetize their equity and realize returns without having to wait for the company to go public or get acquired

• If the buyer is an investor, they receive equity in a company they want to invest in 

• If the buyer is the company, it can reduce share dilution while rewarding existing shareholders with liquidity.

Types of tender offers for private companies

There are two primary types of company-initiated tender offers: Share buybacks and third-party tender offers.

1. Corporate repurchases/share buybacks: In a share buyback, the company repurchases shares from its shareholders—including employees, investors and/or former employees

2. Third-party tender offers: In a third-party tender offer, the company allows investors to purchase shares from existing shareholders.

How does a tender offer work?

The details can vary, but in general, the tender offer process looks something like this:

1. A buyer (or multiple investors) offers to purchase a defined quantity of shares at a set price.

2. The company confirms the offer size and price and gets preliminary approval from its board of directors (BoD).

3. The company works with its legal counsel and the buyers to prepare the disclosures and transaction documents.

4. A 20-business-day window opens for sellers to evaluate the transaction details, decide whether to participate, and if so, how many eligible shares they want to sell.

5. Once the offer window has closed, allocations are finalized and sellers receive proceeds for their tendered shares. 

Under U.S. Securities and Exchange Commission (SEC) rules and the Securities Exchange Act of 1934, tender offers must remain open for at least 20 business days to allow sellers to ask questions, examine the documents, consult an advisor, and decide whether to participate. To help interested sellers make an informed decision, the company will typically provide:

• An offer to purchase;

• A letter of transmittal;

• Financial statements;

• A descriptive list of risk factors and other disclosures.

Tender offer rules and regulations

In addition to SEC rules, companies will often set qualifying criteria for participating in a tender offer—such as a vesting cutoff date (also known as a record date), eligible share classes for sale, and maximum sale limits based on a shareholder’s relationship type. This helps to ensure alignment with company or buyer goals for the liquidity event.

Although it’s less common, some mature companies may only allow participation for shareholders who have exercised their stock options and held the resulting stock for at least six months. 

Tender offer example

Tender offers can go several different ways. Here’s an example of how a tender offer could play out for a fictional company, Meetly, and a fictional investor, Krakatoa Ventures:

1. Krakatoa Ventures offers to buy two million shares of Meetly’s common stock.

2. Meetly’s latest preferred stock price is $50 and the fair market value (FMV) of the company’s common stock before the tender offer is $15. 

3. Krakatoa Ventures offers $40 per share, which Meetly’s BoD approves.

4. The offer lasts for 20 business days.

5. When the deal is completed, employees selling shares in the tender offer will receive their proceeds.

How to prepare your company for a tender offer

Founders and executives have several steps to take when structuring a tender offer for their company. We’ll explain what to consider for share buybacks and third-party tender offers.

1. Decide who will buy the shares 

Will you have a share buyback or a third-party tender offer? 

Share buyback

The primary goal of a share buyback is to provide employees and early investors with liquidity. Buybacks also have the advantage of being less administratively complex than a third-party tender offer. During a share buyback, you can use the cash on your balance sheet to repurchase the outstanding shares, or can use capital raised during a primary fundraise. The latter option is more expensive because it requires issuing new preferred stock to buy back existing common shares.

Third-party tender offer

In a third-party tender offer, the investors have typically already engaged with the company and expressed their interest to purchase shares. Often, executives choose to hold a third-party tender offer if they know, based on investor demand, that an upcoming primary round will be oversubscribed. In these cases, the tender offer can allow investors to buy additional shares from existing shareholders. 

Similar to a primary fundraise, companies conducting a third-party tender will typically identify a lead investor and then fill out the buyer group. As companies build out this pool of potential investors, they should determine whether the lead or any other investor in the group already has a substantial ownership position in the company, as it may impact some tax considerations. 

2. Set a transaction price

Share buyback

In a buyback, the company sets the price it’s willing to pay for shares, and shareholders decide how many of their shares they’ll sell based on that price. Usually, this means pricing the shares at or near the share price of a recent fundraise. 

Third-party tender offer

In a third-party tender offer, companies set a transaction price based on investor demand before the offering period begins. 

The timing of a tender offer can affect the price of its stock. With companies looking to meet surplus investor demand after a primary round, we often see tender offers priced in line with the last primary, or at a discount. The discount usually results from the fact that investors during a primary fundraise are buying preferred shares, while shares traded during a tender offer are often common shares. Preferred stockholders receive priority in a liquidation event compared to common stockholders. 

For a third-party tender offer that doesn’t soon follow a primary capital raise, companies will need to negotiate a price with the investors, similar to how a company might receive term sheets during a primary financing.

3. Decide who will be able to sell their shares: establish transaction size and shareholder eligibility

In addition to pricing, eligibility parameters will set limits on the size of the transaction. For example, will this transaction be for current employees only, or will it include former employees? Will early investors be included? Eligibility will impact things like taxation for employees, as well as your company’s next 409A valuation. 

Some shareholder types, like founders, tend to hold far more shares than other participants. When determining eligibility across your company’s shareholder subgroups, you’ll want to balance the number of shares that larger sellers are permitted to sell against the number of shares that investors have indicated they’d like to buy. 

4. Consider the tax impact to employees

The tax implications for participants in a tender offer (including employees) vary depending on the parameters of each transaction. Due to the complexities involved in structuring a tender offer and the related tax treatment, it’s important to discuss these considerations with your tax advisor, legal counsel, and auditors before you run the tender offer. 

5. Understand the impact on your 409A valuation 

A common misconception among founders is that holding a secondary transaction will cause a company’s 409A valuation to rise sharply and adversely impact future option strike prices. From Carta’s years of experience in the 409A and secondary liquidity space, we’ve learned that this isn’t necessarily true. Like some other secondary events, a tender offer will likely cause a 409A valuation to rise. But some companies find that it’s not a meaningful increase if they have put the proper controls in place around relevant factors, like the number of permitted participants.

→ Learn how Carta helps founders and executive teams understand how a secondary transaction could affect their company's 409A valuation.

Employees: Should you participate in a tender offer?

Receiving stock options or restricted stock units (RSU) from your company is a great compensation perk. But most private stock awards are illiquid, meaning you can’t typically sell the stock you’ve earned for cash unless your company experiences an exit event—like an initial public offering, a merger, or an acquisition (M&A). A tender offer is a way to access liquidity before an exit. 

Ultimately, participating in a tender offer is a personal decision. Here are a few tips to help you decide:

• Go to the info sessions, ask questions, and gather important details—such as transaction parameters and key deadlines.

• Read all the disclosure documents provided by your company to help make an informed decision.

• Talk to a financial and/or tax advisor who can help you figure out if it’s a good idea to participate in the context of your current financial situation and goals.

Also, ask yourself the following questions:

• What are my financial goals? Do I need the money now, or can I wait?

• How’s my company doing? Do I think the value of my stock will continue to rise?

• When do I think the next liquidity event will be?

• How much will it cost to exercise my remaining stock options?

• Do I think the price the buyer is offering is fair?

Pros and cons of participating in a tender offer

What happens if you don’t accept a tender offer?

You don’t have to participate in a tender offer. If you’d rather keep your shares, no action is needed.

How are tender offers taxed for employees?

Depending on the structure and parameters of the transaction, each seller’s proceeds may be taxed as ordinary

income and/or capital gains. The tax consequences of participating in a tender offer will be summarized in your “offer to purchase” document, which also details the terms of the offer.

If you want to optimize your tax withholding strategy, lowering your adjusted gross income by maxing out your 401(k) and increasing charitable donations may help. You should also consult with a tax professional before participating in a secondary transaction.

→ Get more information on how employee stock options are taxed