Tender offers aren’t exactly in the news lately…

They’re confidential business transactions that don’t get talked about publicly, because the companies themselves are not public. (As in, they haven’t gone through an IPO yet.)

But they are happening, and they’re happening more often.

More and more of our clients are coming to us asking for advice on what to do after their company announces a Tender Offer, so we figured we’d write this post to help you understand what they are and what to do about them.

So… What is a Tender Offer?

A tender offer is a way for late-stage startups to raise funds by selling stock in the company to a third party. But rather than selling new or unclaimed shares to the third party, the company allows employees to sell their shares.

So, if you as an employee decided to sell your shares to someone else outside of a tender offer, you’d make money and the company wouldn’t. But, in a tender offer, both you and your company make money: you cash out on your shares, and the company raises cash on their sale.

Essentially, it’s a way to raise funds from an outside investor, with an added benefit to employees.

This stock isn’t available to the public, because it isn’t an IPO. So instead of selling your stock to the market, you can sell your stock to a private buyer before the IPO ever happens. The tender offer happens between a company and a private party, so the public may never know about it.

It gives you more choices with your money, and we’re all for you making the most of this opportunity… if it makes sense for you.


Tender Offers: A Brief, Recent History

We have to practice a level of discretion here, because private companies are not regulated by the Security & Exchange Commission. (This means they’re not required to disclose their private deals.)

But, because we work with tech company employees, we’ve got our fingers on the pulse of this market, so we know it’s happening pretty often.

We’ve experienced a large uptick in our clients coming to us needing financial advice on how to make the most of a tender offer, so we know they’re getting more popular.


Uber & Credit Karma

Uber was the first major company we knew of to use tender offers in a big way. They let their employees sell shares and stock options before their IPO happened, and it was a big part in Softbank’s investment in Uber.

Credit Karma was the next major company to do this, selling $500 Million worth of shares to Silver Lake.


Tender Offers Happening Today: A Growing Trend

I fully expect the trend of tender offers to grow because of the way they create such great win-win-win situations.

Let me explain:

One reason tender offers are so popular is because they’re an incredible way for a company to raise a lot of funds without going public. And with private fundraising, there is a lot of money available. This creates the win for the company.

The third party they sell to typically agrees to pay a certain amount of a certain percentage of the company, which is a win for them.

Theoretically, this could all happen without letting employees sell their shares, but it can be frustrating as an employee to see your stock values go up and up, without being able to cash in on them because the company is avoiding an IPO. Creating a tender offer, where employees can sell some of their shares for cash, creates a winning situation for them as well.

I think it will be a similar trend to the one Facebook started when they decided to grant RSU (restricted stock units) to employees before the IPO happened.

So even if your company hasn’t announced a tender offer to you yet, it can be a good idea to start running numbers. (Especially if you think they might try to do one soon.)


2 Clear Signs Your Company May be Thinking About a Tender Offer

1) They’re doing surveys to find out who’s an accredited investor. 

Some companies or outside investors want employees who participate in a tender offer to be an accredited investor.

There are a few ways to qualify for this:

  • You have an individual net worth of $1,000,000 that does not include your primary residence.
  • You reported at least $200,000 in income for the past two years as a single person.
  • You’re married, and reported $300,000 of combined income for the past two years.
  • You’ll make that same amount this year.

We don’t know why these requirements are in place, we just know that they exist and that we have to work with them. (You can find out more about accredited investor rules and tender offers here.)

If your company is considering a tender offer, they’ll need to know how many of their employees qualify to participate. The reason is, tender offers are usually set up so the buyer can gain a certain percentage of the company. If that percentage isn’t possible, the deal may fall through.

If you’ve seen a survey like this floating around your company, keep your eyes peeled for a tender offer to open up soon.

2) They did a tender offer last year, but you couldn’t participate. 

Tender offers are something that a lot of late-stage companies do more than once before an IPO. Often times, on their first tender offer, they’ll limit the number of employees who can participate. So, if they did it last year and you weren’t on the list to participate, they may loosen their restrictions in future offers.


Your Tender Offer: Should You Sell?

Honestly, there’s no easy answer to this, and it all boils down to your personal finances and the price of the offer.

But the way we see it, you’ve got two opposite choices to consider:

  • Sell as much as you can
  • Sell nothing at all

Yes, they’re polar opposites, but here’s our reasoning behind them, based on the employees we’ve helped through tender offers in the past:


When to Sell as Much as Possible

In most tender offers, there will be a limit on how much equity you’re allowed to sell. You probably won’t be allowed to cash in on all of your stock, so selling as much as your allowed to at this point can be a great decision.


Let’s rewind a few years (or 10) to the day you started working for this company. When they gave you an equity grant, there were an infinite number of outcomes that could have happened with that equity:

  • The company could have totally fallen apart and that equity would have been worth nothing.
  • The company could have become the most successful in the world, and you stock would have made you a millionaire.

Since your company is at the point of a tender offer to raise funds, they still haven’t gone through an IPO yet. That means that the two options above (and everything in between) are still on the table.

If you sell as much as you can now, you eliminate the bad option of the stock being worth nothing one day.

When you sell, you get cash. And at this point—when the bad alternative of the stock being worth nothing one day is still on the table—getting any amount of cash is a successful income.

It’s also a good idea to sell if there’s something meaningful you can do with the money from the sale. Would you be able to pay off your student loans? Or buy a house? Then go ahead and sell.


When to Hold & Sell Nothing

If you fully believe in your company and think your stock will be highly valuable one day, don’t sell.

Remember The Marshmallow Experiment on delayed gratification?

If you don’t remember it, it was an experiment where children were brought into a room with a researcher and a marshmallow. The researcher told the child they were about to leave the room for 15 minutes, and if they came back and the first marshmallow was still there, they’d get a second marshmallow.

If the child wanted to eat the first marshmallow, they were allowed to… they just wouldn’t receive the second marshmallow as a reward.

The study followed the children for more than 40 years after the experiment, and found that the kids who waited the full 15 minutes for their reward were more successful than those who gobbled up the marshmallow immediately or the ones who only waited a few minutes.

Sure, you could get a lot of cash if you sold now… but you could get double (or more) that amount later if you wait. If your finances are solid and you don’t really need the cash, it could be in your best interest to wait. (Provided you believe in the company, of course.)

It can be really hard to decide though, so we help you look through your financial plan to make the right decision.


How to Sell in a Tender Offer (If You Want To)

If you decide you want to sell, there are some important things to do before you close the deal.

1. Read the Offer Documents

First and foremost, read the offer documents the company gives you. Selling involves entering into a legal contract, so you’ll want to know exactly what you’re getting yourself into before you do it. Remember: your company employs a team of lawyers to protect them in these financial situations, so you need to protect yourself too.


2. Decide What to Sell

What you’re allowed to sell may vary depending on the terms of the tender offer. For example, some companies will count RSU as a part of your vested equity, and some will not.

If you’re unsure exactly what to sell or how much you should sell, work with a financial advisor.

Book a Call to Discuss Your Tender Offer


3. Update Your Tax Projections

When you sell your stock options, you have additional income to consider. Some of it may be considered regular income. Some of it may be considered a long-term investment, which is taxed differently.

You’ll want to do a rough estimate of your tax projections before you sell, and then do it again after for a more accurate estimate.

When tax time comes, you’ll most likely owe more money than what’s been withheld in the sale. Go ahead and expect this: it’s pretty standard anytime someone sells their stock options, despite whether it’s through a tender offer, and IPO, or a trading window.

Then, when you know the excess tax you’ll owe, make an estimated tax payment out of the cash you get from selling your stock options. This gets the tax payment out of the way, and allows you to do what you want with the cash without having to worry about your bill in April. (But if you’re cautious, you can make a payment and set aside some money in savings just in case there’s an unexpected surprise on the next tax bill.)


Use Your Cash

Once you’ve got the cash out of the deal: use it. Don’t let it sit around and collect dust in your bank account.

If you’re using it to pay off student debt, close out those debt accounts before you collect any more interest.

If you want to buy a house, buy the house and make that payment.

Get the money working for you so it can contribute to your overall wealth plan and financial health.

If you don’t have a specific financial need for the cash, invest it so it can grow into more. Here’s our guide on how to invest your cash after you sell your stock options.


Exercise More Options

After you sell some options in a tender offer, exercising some ISO (Incentive Stock Options) can be a great way to reduce your likelihood of paying the AMT (Alternative Minimum Tax).

It works because you additional income through selling in a tender offer. When this happens, you can often increase the number of ISO you exercise before triggering the AMT. That’s a really basic way to summarize it, and of course there are other factors to consider, but working with a financial planner is an easy way to figure out that math quickly.



Tender Offers = A Pre-IPO Exit Plan

Another thing to consider is that tender offers are a great way to exercise your options if you want to exit your company to grow your career. It doesn’t keep you tied to the same desk, just waiting for the day when all the shares you worked so hard for will finally vest into something you can sell. It gives you an early way out, and ensures you profit on at least some of what you’ve worked for.

Either way, tender offers—even if they’re not in the news—are an incredible way to expand your personal wealth and make sure you get the most out of your stock options.

But as wonderful as they are, navigating them can be a minefield. You’ve got tons of financial projections, tax rules, and price forecasting to calculate for. It’s hard. Especially if you’re not a financial professional who crunches these numbers every day.

Navigating them can be a minefield of financial projections, taxes, and forecasting… especially if you’re not a financial professional who crunches these numbers every day.

If you suspect your company will announce a Tender Offer soon—or if they’ve already announced one and you’re figuring out what to do—book a discovery call with one of our financial planners today. Our firm works almost exclusively with tech startup-employees, so we’ve seen it all and can help you prepare for everything.