Tender Offer (Startup Equity)

A company-organized event where employees and early investors can sell vested shares to new investors at a set price — providing liquidity before an IPO or acquisition.

A tender offer is a structured liquidity event in which a company facilitates the purchase of existing shares — typically from employees, early investors, and former employees — by a third-party buyer (usually a private equity firm, late-stage growth fund, or the company itself as a buyback). Unlike an IPO, which creates a public market for all shareholders, a tender offer is a one-time, controlled transaction at a negotiated price. The company sets the offer price per share, a window during which participants can elect to sell, and often a cap on how much any single shareholder can sell. Tender offers have become common at late-stage private companies with high valuations and no near-term IPO plans — they give employees a way to realize some value from years of vesting without waiting for a liquidity event that may be years away.

The mechanics of a tender offer typically work as follows: a new investor (or the company using balance sheet cash) agrees to purchase a block of shares at a set price, often established by the most recent 409A valuation or a negotiated premium above it. The company then notifies eligible shareholders — frequently limited to employees above a certain level, those who have been employed for a minimum period, or holders of common stock specifically — that they may tender (offer for sale) some or all of their vested shares within a defined window, often 30-45 days. Participation is voluntary. The company may cap individual sales at a percentage of total holdings (30-50% is common) to ensure employees retain meaningful equity stake. After the window closes, the buyer purchases the tendered shares, and participating employees receive cash proceeds.

Tax treatment depends on how long you've held the shares and what type of equity you're selling. If you're selling common stock acquired through ISO exercise and you've met the qualifying disposition holding periods (at least two years from grant and one year from exercise), your gains are taxed as long-term capital gains — a significantly better outcome than ordinary income rates. Selling within those periods (a disqualifying disposition) means the spread is taxed as ordinary income. RSUs that have already been taxed at vest (ordinary income on delivery) give you a cost basis equal to the FMV at vest; if the tender offer price exceeds that, you owe capital gains tax on the difference. NQSOs are taxed as ordinary income on the spread at exercise, then capital gains on subsequent appreciation. A financial or tax advisor is worth consulting before participating in any tender offer, particularly with options that haven't been exercised.

Tender offers create decisions that employees often aren't prepared for. The offer price may feel like a windfall but may also significantly undervalue what the company could be worth at IPO or acquisition — many employees who sold in Facebook's pre-IPO tender offers left significant money on the table. Conversely, employees who passed on Groupon's pre-IPO tender and held through the IPO and subsequent decline lost value. There is no universally correct answer. The relevant variables are: your personal financial situation (do you need diversification?), your belief in the company's trajectory, how much of your net worth the unvested equity represents, and the opportunity cost of the cash. Selling some (if capped) and holding the rest is often a sensible middle path that balances liquidity with upside participation.

What to Evaluate Before Tendering

  • Offer price context: what is the price relative to the 409A valuation, the most recent preferred share price, and any public comparables? A tender at 1× 409A is very different from 1.5× 409A.
  • Cap and eligibility: how much can you sell? Are there minimum employment tenure requirements? Which share classes are eligible (usually common, not options that haven't been exercised)?
  • Tax consequences: what did you pay for these shares and when did you acquire them? Are you selling ISOs within the holding period (ordinary income) or outside it (long-term capital gains)?
  • Company trajectory: what does the most recent investor deck say about path to liquidity? If an IPO is genuinely 18 months away, tendering at a discount may be unnecessary.
  • Net worth concentration: if your unvested equity represents 70%+ of your net worth, some diversification via tender is prudent financial planning regardless of your company conviction.
  • Post-tender equity: what vested shares and unvested grants will remain after you tender? Make sure you aren't selling so much that you lose meaningful upside.

Common Tender Offer Restrictions

  • Sell cap: companies typically limit each participant to selling 20-50% of their vested shares to ensure employees remain incentivized.
  • Minimum tenure: many tender offers exclude employees hired within the past 12-24 months.
  • Share class limitations: tender offers often cover only common stock, not unexercised options — you may need to exercise first (and pay the strike price) to participate.
  • Pro-rata reduction: if more shares are tendered than the buyer agreed to purchase, each participant's sale may be reduced proportionally.
  • Right of first refusal: your company's ROFR clause in your stock purchase agreement may give the company or its investors the right to match any third-party purchase before it clears — this is usually already handled in a company-organized tender, but matters for secondary market sales.
  • Lock-up post-IPO: if you participate in a pre-IPO tender, you may still be subject to a 6-month IPO lock-up on any shares you retain.

Tender vs. Secondary Market Sale

  • Tender offers are company-organized and company-approved — they come with certainty of price, company cooperation (often necessary to update the cap table), and no need to find a buyer yourself.
  • Secondary market platforms (Forge, EquityZen, Hiive) allow private sales without company involvement — but the company's right of first refusal may block or complicate transactions, and not all companies cooperate.
  • Company-organized tenders typically offer better pricing and cleaner execution; secondary markets may be the only option between tender windows.
  • Some companies prohibit secondary market transfers entirely — check your stock purchase agreement before attempting any sale outside a company-organized event.
  • Tender offers are fully legal; unsanctioned secondary sales may violate your grant agreement and put your equity at risk if the company exercises its ROFR and then refuses to complete the process.

Example

A senior engineer has been at a late-stage AI startup for four years. She holds 200,000 vested shares of common stock with a 409A valuation of $8/share. The company announces a tender offer at $10/share (a 25% premium to 409A) led by a growth equity fund, with a cap of 40% of vested holdings. She can sell up to 80,000 shares for $800,000. She paid $0.10/share (her ISO exercise price) four years ago and has met both qualifying disposition holding periods, so her $9.90/share gain ($792,000) is taxed at long-term capital gains rates — roughly $160,000 in federal tax at the 20% rate, leaving her ~$640,000 net. She sells 60,000 shares (below the 80k cap) and retains 140,000 vested shares plus unvested grants, keeping meaningful upside while diversifying. The company IPOs 18 months later at $22/share — her retained shares are worth $3M at IPO, but she doesn't regret the partial tender given the certainty it provided.