Understanding Tender Offers at Startups
What Is a Tender Offer?
A tender offer is a type of liquidity event where a company or investor offers to purchase shares from employees and investors at a set price. This provides an opportunity for stakeholders to convert some or all of their equity into cash, often the first liquidity event for startup employees, typically coinciding with a new funding round.
Tender offers are more common in late-stage startups looking to reward early employees or allow investors to realize partial returns. Tenders have become more popular in recent years as startups stay private longer and IPO timelines extend, giving employees fewer natural liquidity opportunities.
How Do Tender Offers Work?
- Offer Announcement: The company announces the tender offer, detailing the price per share, total shares being purchased, and eligibility criteria (ie only current employees or employees hired before a certain date).
- Participation Window: Employees and investors eligible to participate are given a window to accept or decline the offer.
- Completion: If accepted, shares are sold, and participants receive cash based on the agreed-upon price.
Why Do Companies Offer Tender Offers?
Tender offers serve several purposes:
- Employee Retention: Providing liquidity helps employees unlock some value from their equity while staying motivated for future growth.
- Investor Alignment: Early investors can secure partial returns without waiting for an IPO or acquisition.
- Market Signal: A tender offer can signal confidence in the company’s valuation and long-term prospects.
What Should Employees Consider?
- Valuation: Review the offer price to ensure it’s fair. Typically a Tender Offer represents the best possible price you can get at that time, but it is worth checking the Secondary Market.
- Taxes: Selling shares may trigger taxes, including capital gains. It’s important to understand the implications for your specific situation.
- Future Growth: Consider the company’s long-term potential. Selling in a tender offer may limit your upside if the company grows significantly.
- Liquidity Needs: Assess your immediate financial needs versus the potential future value of holding your shares.
Tender Offers vs. Other Liquidity Options
- Tender Offers: Provide partial liquidity and are typically organized by the company or a major shareholder.
- Secondary Sales: Employees sell shares independently, often through a platform like Forge. These sales may have less structured pricing and limited availability.
- ESO Fund: Offers liquidity without requiring a sale. Employees can retain their equity while accessing cash to meet immediate financial needs.
ESO Fund and Tender Offers
If you're considering a tender offer but don’t want to sell all your shares, ESO Fund can provide a risk-free alternative. We offer funding to help you exercise stock options or access liquidity without giving up your equity entirely. Our approach allows you to benefit from the company’s long-term growth while addressing your financial goals today.
Learn More
If you're navigating a tender offer or exploring liquidity options, ESO Fund can help. Reach out today to discuss your equity needs.
Written by Jordan Long, Marketing Lead at ESO Fund
