Tender Offers: The New IPO
With over 400 IPOs in the United States this year, new companies are coming to market with fresh ideas ranging from cloud-based storage companies like Snowflake to next-generation automobiles like Lucid Motors. Working at these companies can be financially rewarding for employees, but the wait for that moment can be long and uncertain. Increasingly, companies are electing to stay private longer in order to grow sales and increase valuations.
Employees at startup companies receive stock options as a part of their compensation and hold these shares, plus additional grants, with the hope of future rewards — but without any way to convert them to actual cash. This uncertainty has been part of working for high-potential startups, but the agreement only works for so long without a liquidity event.
Companies recognize this, and the landscape is slowly shifting. Prior to going public, certain late-stage startup companies have started giving their employees the opportunity to participate in a tender offer to generate an earlier benefit.
What Is A Tender Offer?
A tender offer is a structured, company-sponsored liquidity event that typically allows multiple sellers to tender their shares either to an investor or back to the company.1 In other words, it gives employees a way to sell some of their shares while their company is still private.
This opportunity to sell often comes when an outside investor wants to buy a significant stake in a private company. In 2018, SoftBank bought a 20% stake in the ride-share company Uber, providing employees with a chance at liquidity. Similarly, the private equity fund Silver Lake bought into Credit Karma.2 The former company ultimately completed an IPO, while the latter is still private. When done well, a tender offer creates a win-win for the company and employees.
For the company, the infusion of cash can be critical as they scale up their operations. Additionally, tender offers typically offer a premium to the most recent private valuation, thus raising the valuation profile and allowing the company to recruit new talent while building morale on their current team. For the employees, the tender offer is an opportunity to access liquidity from their shares without waiting for the company to go public, and also provides a sense of progress.
A Bird in the Hand
There are varied reasons for deciding to participate in the tender offer and trade a bit of future potential for present certainty.
One way of looking at a tender offer is an opportunity to take some risk off the table. The timeline to an IPO may be years away, and you have current priorities that could be accelerated with additional liquidity. Buying a house, funding a sabbatical or paying down debt, or creating retirement security would be reasons to participate in a tender offer. If your company stock represents the vast majority of your net worth, it might also make sense to diversify your portfolio. While it can be easy to get caught in the excitement of working for a private company on a strong growth trajectory, it is important to remember there is no guarantee of future success for any company.
Alternately, if you have sufficient liquidity and your net worth isn’t overly concentrated in your company stock, then it can make sense to skip the tender offer and retain all your shares in hopes of a larger future windfall. For these reasons, the two most common strategies for tender offers are to sell as much as allowable or sell none at all. That said, tender offers typically limit the number of shares an employee can sell, often capped at 20%-25% of vested shares.3 Even if an employee is able to sell the entire allowable amount, they still retain the majority of their exposure to future growth.
When an IPO arrives, employee sales of the company stock are usually restricted by a lock-up or blackout period for the first 180 days. Employees are not able to take advantage of an initial jump in price, and the stock often declines ahead of that six-month mark as the market anticipates significant selling when employees and investors emerge from the lock-up period. There are times when the tender price is actually higher than the market price at the end of the blackout period — which was true for Uber employees.4 The employees who participated in the tender offer were glad to have taken the bird in the hand, and were potentially more equipped with liquidity to patiently hold their remaining stock while the price recovered.
Having the Right Team
Being a part of a company that is going public can be very exciting. For many, this is the day they have been waiting for since joining the company. It can also be daunting and confusing to analyze the tax implications of your alphabet soup of equity benefits, from ISOs to NQSOs, to RSUs.
Having the right team in place can allow you to appreciate the opportunity without being consumed by the decision process. The best outcomes arise from combining technical tax analysis alongside a financial plan that looks at quantitative considerations through the unique lens of your life. What starts as a question of how many options to exercise and how much to set aside for estimated tax payments, continues as a question of how to use the proceeds to accomplish near-term goals or optimize your long-term financial security.
At North Berkeley, we collaborate with tax professionals to help you navigate complex questions with confidence. The decision of whether to participate in a tender offer isn’t one-size-fits-all, and having the right team in place can bring clarity to the tradeoffs and make sure your decisions are aligned with your long-term goals.
 Silver Lake Buys $500 Million Stake in Credit Karma and employees get to sell via tender offer WSJ
 Each company tender offer has a maximum amount of shares that the company is willing to buy back. Sometimes when there are too many people who want to sell their shares, a tender offer may become “oversubscribed”. This means that more employees wanted to sell their shares than the company was willing to buy.
 Softbank tender offer valued employee shares at $40/share. While the company IPO’ed at a slightly higher price in May 2019, the price traded at approximately $27 per share when employees emerged from their 180-day trading lockup. CNN
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