Equity compensation is a popular strategy used by startups to attract and retain top talent, and it can sometimes result in significant financial rewards for founders and employees alike. However, realizing the value of equity can be rare, particularly when the company has no immediate plans to go public. Tender offers are one such strategy that provide a solution for employees to unlock the value of their equity without waiting for an Initial Public Offering (IPO) or acquisition. In this guide, we’ll explore the ins and outs of tender offers, discuss their associated tax implications, and give you the information you need to plan ahead for any tender offers in your future.

Table of Contents:

  1. What Is A Tender Offer?
  2. How Does A Tender Offer Work?
  3. Do You Owe Taxes In A Tender Offer?
  4. Pros and Cons of Tender Offers for Startup Employees
  5. Personal Financial Planning Considerations
  6. Frequently Asked Questions

What is a Tender Offer?

A tender offer is a liquidity event in which a company, investor, or group of investors propose to buy a fixed number of shares from existing shareholders at a set price. Tender offers can be made for both private companies and public companies, with recent examples of both being Stripe and Twitter, respectively.

It is important to understand the differences between tender offers and IPOs. Both are liquidity events, but an IPO (Initial Public Offering) involves a company’s first listing on a stock exchange like the New York Stock Exchange or Nasdaq. A tender offer, on the other hand, is not a public event and doesn’t guarantee that a company will eventually go public.

How Does A Tender Offer Work?

Tender offers can be initiated for various reasons, from takeover bids (i.e., Twitter) to fundraising events (i.e., Stripe). Once the terms are agreed upon, it’s the company’s responsibility to notify shareholders and employees about the upcoming liquidity event and provide them with the offer’s terms so that they can plan ahead. Tender offers, such as in the case of Stripe, are not always large enough to buy every share of the company, and in such cases, there might be restrictions on which employees or types of equity are eligible to participate in the sale.

In the case of Stripe, for their 2023 tender offer, the payment processing company used the money raised to provide liquidity to many of its early employees holding double-trigger RSUs that were set to expire after 10 years in 2024. By arranging a tender offer, Stripe was able to facilitate both a liquidity event for its earliest employees, and cover the associated taxes in the process.

For employees ineligible for a tender offer or those who prefer to sell their shares on their terms, secondary sales may present a viable alternative option. Secondary sales represent a different type of liquidity event in which existing shareholders sell their shares directly to private investors or through an online pre-IPO startup equity marketplace. Secondary sales are growing in popularity and can allow employees more freedom in when and how they sell their shares, but often still require final approval from their employer.

Do You Owe Taxes In A Tender Offer?

A tender offer is an organized sale of company shares, and the taxes owed depend on a number of factors including the types of shares you have, how long you’ve held them, and if you’ve made any tax election you’ve made such as an 83(b) Election.

Restricted Stock Units (RSUs) and Non-Qualified Stock Options (NSOs), for example, will be subject to both ordinary income tax when they vest, and capital gains tax when they are sold. Because of this, timing the sale to align with a tender offer can provide you the liquidity needed to cover both the ordinary income tax and the capital gains taxes all at once, which can be highly beneficial depending on your cash on hand. Keep in mind that NSOs will need to be exercised before they can be sold in a tender offer.

Incentive Stock Options (ISOs), on the other hand, are only subject to capital gains tax, and taxes are only owed when shares are sold, though depending on the size of the sale, exercising ISOs can result in Alternative Minimum Tax (AMT).

Pros and Cons of Tender Offers for Startup Employees

Participating in a tender offer is a major financial consideration, and you should consult your Harness Tax Advisor or other tax professional before making any final decisions. Here are some positive and negative considerations to keep in mind:



Personal Financial Planning Considerations

No matter the amount of cash you end up with after a tender offer or other liquidity event, thoughtful personal financial planning should always be considered as your immediate next step. Here are some general strategies to consider:

Frequently Asked Questions

How Harness Wealth Can Help

Tender offers can provide startup employees with a tremendous opportunity to unlock the value of their equity compensation. However, participating in a tender offer is not without its potential drawbacks, such as tax implications, and the risk of missing out on future growth. As a startup employee, it is essential to evaluate your personal financial situation, goals, and risk tolerance, and consult with your Harness Tax Advisor or other tax professional and financial advisor before making any decisions related to tender offers or other liquidity events.

If you have equity compensation and have questions about how a tender offer might impact your financial goals and needs, consider booking an Equity Tax Planning Session with Harness Wealth. Our equity-experienced tax advisors will answer any question about your equity, and provide projections around potential equity decisions to help you make an informed decision for your financial future.

Great advisors strive to build your confidence when making important financial decisions. Find yours.

Tax services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is an internet investment adviser registered with the Securities and Exchange Commission (“SEC”). Harness Wealth Advisers LLC solely acts as a paid promoter for unaffiliated registered investment advisers. Harness Wealth Advisers LLC’s registration as an investment adviser with the SEC does not imply a certain level of skill or training.

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, the reader is encouraged to consult with the professional advisor of their choosing. All investments have risks and have the potential for profit or loss.