Picture an employee who joined a startup in its second year, took a lower salary in exchange for stock options, and has watched the company grow ever since. On paper they are doing well. In practice they cannot sell a single share, because the company is private and shows no sign of going public. A tender offer is one of the ways that situation gets resolved.
A tender offer is a company-organized event in which some existing shareholders, usually employees and early backers, can sell part of their shares to new or existing investors. It happens while the company is still private. Rather than waiting years for an IPO or acquisition, people get a chance at some liquidity.
Why companies run a tender offer
Staying private for longer is now common, and that leaves many employees holding stock they cannot sell. A tender helps in a few ways. It rewards people who took risk early. It can help with retention, since someone who has paid off a mortgage may feel less pressure to jump ship, although the opposite can also happen. And it lets the company bring in a trusted outside investor to set a share price without rushing to list on the stock market.
Some founders also use a tender offer to avoid a messy situation where departing employees lose access to the value they helped build. Investors like a tender offer as well. A secondary sale lets them buy shares in a company they admire without the company issuing new stock, which means no extra dilution for existing holders.
How it differs from a funding round
In a typical funding round, a company issues new shares and the money goes into the business. In a tender offer, the shares already exist, and the cash goes to the sellers. The company does not receive the proceeds, although it may organize the process and sometimes buys back the shares itself.
That distinction matters when you read headlines. A tender at a given valuation tells you what a buyer was willing to pay for existing shares. It is a useful signal, but it is not the same as a primary round, and the terms can differ. The phrase also has a public-market meaning, described in this overview of tender offers.
Who gets to sell
The company sets the rules. Current employees are often included, former employees less often, and some offers require a minimum tenure. Many limit how much of your holdings you can sell, commonly a percentage, to keep people invested. Usually only shares you already own are eligible, so unvested options generally cannot be sold. And employees typically hold common stock, which buyers may prefer at a discount compared with the preferred shares investors hold.
A hypothetical case shows how this plays out. An employee holds vested shares worth a figure that would change their family’s finances if they could sell. The offer lets them sell, say, a fifth of their holding. They take it, clear a debt, and keep the remainder invested. They have not bet against the company; they have simply made one big risk a little smaller. Read the tender offer documents carefully. They are long, but they tell you the price, the deadlines and the conditions, including what happens if the offer is oversubscribed and everyone gets scaled back.
The tax question
This is where people get tripped up. If you hold options, you may need to exercise them first, and exercising can trigger a tax bill even before you sell. When you sell, the gain is taxed, and the rate depends on your country, how long you have held the shares and the type of option.
I will not give tax advice here because the rules vary and mistakes are costly. Speak to a qualified tax professional before you decide. Ask about the timing of exercise, any special treatment that might apply to your shares, and how much cash to set aside for the bill.
Should you sell?
There is no universal answer. The case for selling some shares in a tender offer is mostly about risk. If most of your wealth sits in one private company, diversifying is sensible. A down payment or paying off debt is a perfectly good reason. And private companies do fail, so paper wealth can vanish.
The case for holding is that you believe the company will be worth much more, or that your tax treatment might improve if you wait. A middle path is common: sell enough to take a real weight off your shoulders and keep the rest.
Before you accept a tender offer, put these questions to HR or finance:
- How was the price per share set?
- What is my cap, and what happens if the offer is oversubscribed?
- When are the deadline and the payment date?
- How much tax is withheld, and how is it reported?
A large valuation attached to a secondary sale can sound like a company has “made it.” Keep perspective. A valuation is a negotiated figure, and the shares you sell may sit lower in the pecking order than the preferred shares held by investors.
Still, a well-run tender offer is a healthy sign for a company that wants to treat its people fairly. If your employer offers one, take the time to understand it, write down your own reasons for selling or holding before you look at the price, and take advice before you click accept.
Related reading: Why Short, Memorable Domain Names Are Worth Real Money and When an Edtech Giant Sells Far Below Its Peak: What It Tells Us.
Photos: Marvel44 (CC BY-SA 4.0, Wikimedia Commons); Marvel44 (CC BY-SA 4.0, Wikimedia Commons).
