Tender offers are an essential concept in investing, especially relevant to tech industry employees who hold equity compensation in private companies.

In this post, we explain how tender offers work and their significance for employees, investors, and companies in the tech sector.

What is a Tender Offer?

For our client’s purposes, a tender offer is an opportunity for an employee to sell (liquidate) some of their shares through their employer’s internal offering. As part of this offering, the employer will set an offered price and generally a limit to the volume of equity that can be sold.

Key terms include:

Price: The offered value that the employer is willing to provide employees in exchange for their shares or options.
Timeframe: A limited window within which shareholders can decide to accept the offer.
Conditions: These may include a minimum number of shares sold for the offer to proceed and potentially a maximum volume available to each employee to sell.

Tender offers are frequently used by private tech companies as part of liquidity events, allowing employees to cash out some of their equity before an IPO or acquisition.

How Tender Offers Work

Announcement: The company or bidder announces the intent to purchase shares, often accompanied by a notice to employees.
Offer Terms: Employees are provided with the details, including the price per share and any conditions.
Employee Decision: Employees decide whether to sell their vested shares or hold onto them.
Regulatory Review: Depending on the jurisdiction, regulatory bodies may review the offer to ensure compliance with securities laws.
Outcome: If enough shares are tendered, the transaction proceeds. If not, the offer may be withdrawn or revised.

Why Tender Offers Matter for Tech Employees

Tender offers can be pivotal for tech employees because they provide an opportunity to realize the value of equity compensation. Key benefits include:

Liquidity: Employees can convert stock options or RSUs into cash.
Diversification: Selling some shares allows employees to diversify their financial portfolio.
Financial Planning: Tender offers provide a clear valuation and timeline, which can aid in planning for taxes and personal goals.

3 Types of Tender Offers in Tech

Company-Led Liquidity Events: Often initiated by the company to provide liquidity to employees and early investors.
Investor-Led Offers: Third-party investors may offer to purchase shares to gain a stake in the company.
Partial Tender Offers: Employees can sell a portion of their vested shares while retaining some for future gains.

Advantages and Risks for Tech Employees

Advantages:

Provides liquidity in privately held companies where shares are otherwise illiquid.
Can help employees manage tax liabilities tied to RSUs or exercised options.
Offers an exit strategy before a potential IPO or acquisition.

Risks:

Selling shares may lead to missing out on future appreciation if the company’s valuation increases significantly.
Tax implications can be complex, especially for ISOs (Incentive Stock Options) and RSUs. A tender offer opportunity may trigger a taxable event on RSUs regardless of selling participation.
Tender offers may signal internal or market changes, such as a delay in an IPO

Regulatory and Legal Considerations

For tech employees, understanding the legal and tax implications of tender offers is crucial. Key considerations include:

Vesting Schedules: Only vested shares are eligible for sale.
Tax Implications: Proceeds may be subject to income tax, capital gains tax, or both. Consult a tax advisor for personalized guidance.
Fair Market Value (FMV): The tender offer price may differ from the FMV set by the company’s 409A valuation.

4 Tips for Tech Employees Considering a Tender Offer

Understand the Terms: Carefully review the offer, including price, timeframe, and conditions.
Consult Advisors: Work with financial and tax advisors to understand the implications for your situation.
Consider Long-Term Goals: Weigh the benefits of liquidity against the potential for future appreciation.
Diversify Strategically: Use tender offers as an opportunity to reduce financial reliance on a single company.

Conclusion

Tender offers are a valuable mechanism for tech employees with equity compensation to access liquidity and plan for their financial future. Understanding the mechanics, risks, and benefits of these offers is essential to making informed decisions.

For tech employees, participating in a tender offer can provide a rare opportunity to realize the value of equity in a privately held company. However, it’s equally important to evaluate the potential trade-offs and consult experts to ensure the decision aligns with your financial goals.

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DiversiFi Capital LLC is a registered investment adviser located in CA and may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered, notice filed, or where we qualify for an exemption or exclusion from registration requirements. Any communications with prospective clients residing in jurisdictions where DiversiFi Capital LLC is not registered or licensed shall be limited so as not to trigger registration or licensing requirements.

Past performance is not indicative of future returns, and investing always carries inherent risks, including the potential loss of principal capital. Any investment strategies are specific to individual clients and may not be representative of the experiences of all clients.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.

Tender Offers: Explained