What Is a Tender Offer?
Tue Jul 12 2022
5 min read
Tender offers occur when a company makes an offer to employees to purchase some of their stock.
If you have stock options, this is a chance to get some early liquidity by exercising your options and then selling the exercised shares as part of the offer.
While tender offers are attractive, you should be aware that you may end up paying higher taxes and leaving more money on the table than you realize.
An early way to cash out
You have been working hard; you have been patient. Your pile of vested stock options is growing bigger every month, but you know that an initial public offering (IPO) will be years down the line.
You’re content to wait, knowing you’ll exercise when you leave the company.
Suddenly, your company makes an unexpected announcement. It’s making a tender offer, which is an offer to option-holders and shareholders to sell some of their stock back to the company for a fixed price. This means you now have the chance to cash out your options by exercising them and then selling the shares to your company – years before you expected to be able to do so.
👉 A tender offer is an offer to stock option holders and shareholders to sell some of their stock back to the company for a fixed price.
Should you take your company up on their offer? What should you know about before saying yes?
Why do startup companies make tender offers?
Once a startup reaches Series C or beyond, it’s not unusual for the company to make a tender offer to employees. On the one hand, tender offers function as incentives for employees with an early opportunity to get some tangible cash value from their stock options (or shares, if they’ve already exercised them). On the other hand, startups may make tender offers because doing so also gives them a chance to take on new investors while minimizing dilution.
If a startup takes on a new investor, it will have to issue new shares, which would dilute everybody’s stake. But if some of the shares can come from existing shareholders – such as employees – then it can reduce the number of new shares issued, or even avoid issuing new shares entirely.
👉 Many tender offers happen in conjunction with fundraising rounds when new investors want to come onboard. This can minimize dilution by buying back shares from existing shareholders.
Many tender offers tend to happen in conjunction with fundraising rounds, and existing investors may be looking to maintain target ownership percentage with shares. Sometimes, the tender offers are made by investors and not the company itself, making it essentially a secondary market transaction.
For example, when SoftBank acquired a 15% stake in Uber in late 2017, it did so via a tender offer. The same happened when private equity firm Silver Lake bought a $500 million stake in personal finance portal Credit Karma in early 2018 – no new shares were issued, as the entire stake came from the tender offer.
How do tender offers work
Tender offers give current shareholders the chance to sell their stock at a certain price within a certain time frame. There is no set price, and ultimately, it is up to the buyer. For instance, if the tender offer is made by an outside investor, they may offer a price above the fair market value (FMV) of the common stock to encourage shareholders to participate.
Once a tender offer is announced, your company should issue official documentation listing out all the relevant terms and conditions of the offer. These should include:
Deadlines: How long the tender offer is open. Tender offers usually last for at least 20 days (as per SEC guidelines).
Pricing: The price-per-share for the offer.
Number of shares on offer: This will influence how many shares you’re able to sell as part of the offer. It’s highly unlikely you’ll be able to sell all of them, as tender offers are usually made for a certain number of the company’s shares.
Eligibility criteria: Not all tender offers are open to all shareholders or those with stock options. For instance, some companies may limit them only to accredited investors. Or they might only open them to those who’ve already exercised their stock options and held the shares for a certain amount of time (e.g. six months).
Most companies will also hold information sessions in conjunction with tender offers. So, if you have any questions about the terms and conditions of a specific offer, make sure to ask!
Things to know before you say yes
Assuming the tender offer’s sale price is substantially higher than your strike price and you meet all the eligibility criteria, it might be tempting to immediately say “yes” and sell as many shares as you can. But before you rush in, consider the following:
It may not be a one-off event. Some startups may only carry out these tender offers in certain fundraising rounds, making them a rare occasion. But others make it a much more regular event. If your startup falls into the latter category, that means you don’t have to decide immediately – you always have the next one. Be sure to check with your company (or your colleagues) to determine how often these tender offers are made.
You may end up missing out on more future returns than you realize. While tender offers can give you immediate liquidity for your stock options, you’re also giving up any potential future appreciation in the shares’ fair market value. And this might be more than you realize. There are prominent examples of tender offers that were almost immediately followed by exits at much higher prices. For example:
In October 2019, Asana conducted a tender offer at $15.82/share. Less than a year later, it went public at $27/share.
In February 2020, Snowflake conducted a tender offer in conjunction with its Series G financing at $38.77/share. In September that same year, it not only went public at $120/share – its share price also more than doubled on its first trading day.
Should you go for the current offer?
There is no simple yes or no answer to this question. You’ll need to consider whether the immediate liquidity now is worth (potentially) incurring higher taxes and giving up potential future appreciation. As the old saying goes, it could be worth it to have a bird in hand — especially if other life events are happening, like starting a family or buying a house. Ultimately, it comes down to your own personal situation – much the same as determining the best time to exercise your stock options.
👉 Remember, it's likely not an all-or-nothing proposition – you can always cash out some but not all your options.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for investment, tax, legal, accounting, or other professional advice. Vested does not provide investment, tax, legal, accounting, or other professional advice. You should consult your own investment, tax, legal, accounting, or other professional advisors before engaging in any transaction or equity decision.