During a ‘down time’ in the economy, many companies may turn to tender offers to satisfy grumbling employees who expected an IPO. Other private companies may provide tender offers as the company becomes more mature and stable. This is generally in the later stage of the tech life cycle.
Tender Offers are a funny animal. Each company may do this a little differently. Generally, a funding round with an institutional investor will allow this. Then, it depends on the amount the investor will allow to go to a tender offer vs be invested in the business.
This creates a ‘cap’ of how much employees can sell in shares or options. Usually, we see this at around 20% of shares/options owned or $X (could range from $50,000 to $1M).
The majority of tender offers look at all share types equally. So if you own ISOs, NQSOs, or actual shares, you will be able to determine what mix of those will get you to the total 20% of shares available to tender.
How do you decide what to tender in an offer?
Each type of option (or actual stock owned) provides a different pro/con list of how to think about what to tender.
Things to consider:
For shares you own, are any on their way to being eligible for the QSBS exclusion?
Which options are above water (tender price > strike price)?
What liquidity do I need for the next few years? Do I have enough cash or investments I can pull from at this point?
What liquidity would I like to have for the next few years? Maybe you are working towards a new goal that could use a little extra funding
Do I plan on moving on soon to a new company? If so, then options will expire within 60 to 90 days of termination and will require a big cash outlay to exercise any (potentially)
For ISOs, if you exercise and sell immediately, they become compensation income and are treated like exercising NQSOs
Submitting your Tender Offer request
The company will need to confirm whether you can actually tender the full amount requested. There is always the possibility that a tender offer is ‘oversubscribed’ with more demand than expected. If this happens, the company will reduce the total amount of shares or options you can ultimately tender.
Once the tender offer is complete, review your next pay stub / the summary document you receive from the transaction.
Depending on the shares or options you tendered, the amount of tax withheld through the tender offer may not be enough to cover your total tax bill.
Please make sure you make an estimated tax payment on what you expect to owe in the future. It’s never fun to realize you are short on cash once the tax return is finally prepared.
Use the Tender Offer to Augment your Life
I hope you get to use a tender offer to lean into your values. There is nothing like putting a little more money away towards financial independence, buffering your cash cushion, or helping your community and family towards a better future.
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.
