What does it mean for my startup to have a tender offer?
A tender offer is a startup’s way of providing liquidity to employees and offering shares to others. Often we see this start to happen as the company gets closer to IPO or decides to delay IPO. In part, this helps employees see the value of their hard work and in part helps the company provide stock to potential investors.
Generally, we see startup tender offers limited to a maximum of $X or Y% per person. The more common caps we’ve seen are up to $1 million in value or 50% of stock outstanding. This is because tender offers are generally fueled by investor money or profits and so there is a total cap. If the tender offer is ‘oversubscribed’, that means there is more demand for tendering shares for cash than can be fulfilled. In this case, your total request of shares to be bought back may be further limited.
Review your personal financial situation to decide whether participating in the tender offer is right for you.
- Are you hoping to buy a new home?
- Are you expanding your family and want to get a head start on college funding?
- Will you be leaving the startup soon and need to plan for a potential clawback?
- Do you want to exercise more stock options and are facing a cash crunch?
- Do you want to diversify out of your startup stock a bit for future flexibility?
There are many opportunities in selling back some shares in a startup tender offer. Other questions can be found in our tender offer basics post.
What should I consider during a tender offer?
- Why is the company doing a tender offer? Is this an opportunity for investors to get in when they believe the stock is undervalued? Or is this to provide liquidity while waiting for IPO/M&A?
- What is the valuation the shares are being offered at? If the shares are ‘underwater’ i.e. under the exercise price for options or RSU vesting price, you may feel differently about tendering the options. Generally, there is no reason to tender stock options under the exercise price.
- How do I feel my company is doing? Are you surprised at the valuation? Do you see a long road ahead for the company? Or do you feel the company is at a lower point now with the right metrics to get it to an even better Series XYZ in a year or two? Although your assessment is biased, it is something to consider and weigh the risk / reward of keeping more shares. I like to ask the question as: If you had the value of what you expect from the tender offer in cash, would you buy company stock with it?
- What are the tax implications? Each type of stock option and currently held share may have different tax implications in a tender offer.
- Which experts are in my corner to make sure I am considering the implications? Consult with your financial advisor or tax advisor to plan for the best outcome. If you are looking for guidance, schedule some time with us to think through options HERE.
What are the tax implications in tendering my shares?
- Unexercised stock options: the difference between the sales price and exercise price will be treated as ordinary income (compensation)
- Exercised ISOs:
- If held short term or less than 2 years from grant date, this would disqualify the special tax treatment and turn it into an NQSO sale. We rarely recommend doing this since you may have already paid AMT taxes at exercise and will not be able to get a credit back. This will be treated as ordinary income (compensation)
- If held long term, this will result in long term capital gains/losses
- Exercised NQSOs: short term or long term capital gains/losses
- Vested RSUs: short term or long term capital gains/losses
- Unvested RSUs: these are generally ineligible for tendering
Beyond what type of income or gains/losses each type of stock will be, there is also the question of who is paying any taxes due to the IRS and state tax department. We suggest reviewing your paystub post-tender offer to see what came through the paystub vs. what did not. You will be liable for the taxes in the end, so it is better to know now than when you file your tax return.
Is a tender offer better than an IPO?
Startup tender offers can be rewarding and less stressful. Instead of watching the market daily while you wait out your lock up period, a tender offer allows you to review your finances with a known price. It is a great way to financially profit while waiting for an IPO or Merger to happen “one day”.
I love it when a long-time startup employee comes to us with RSUs and ISOs in a tender offer. Then, we work together to find the best strategy based on their situation. Our goal is to understand where you want to be financially and keep it front in center. Then, we balance tax implications, risk exposure, and long term growth at a level you are comfortable with.
For many of our clients going through tender offers with RSUs and ISOs we are able to purchase ISOs, minimize AMT taxes and diversifying out a large portion of cash from the event. This makes my heart sing for my clients!
Can a startup force a repurchase of shares?
This is often called a ‘Clawback provision’. If a startup includes a clawback in the plan documents, the company may be able to repurchase shares at termination or in the case of an exit. Typically, the buy back will be at the fair market value of the shares at that time and can prevent you from realizing the full value of owning the shares.
An example of the downside of clawbacks can be seen in the Skype acquisition by Microsoft. Read more about it HERE and see some in depth examples HERE.
Another example of a clawback in action is if you make an 83(b) election and leave before your shares fully vest time-wise. The company typically has 90 days to repurchase any of your unvested shares at the same price you paid.
Those are the most common examples of a forced buy back, but not something we commonly see occur as part of a tender offer.
In the end, the best plan for a startup tender offer is the one where you decide how this event can get you closer to your financial goals.
If you are looking for a thinking partner in how to optimize and streamline your finances, schedule some time to chat with us.
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
