As a startup or private company employee, you may have the option to participate in a tender offer from your employer. Accepting a tender offer means the company buys back some of your stock or options. While it won’t always make sense to participate, any opportunity for liquidity as a private company employee should be considered. Tender offers are becoming more common as more companies stay private for longer, and with the years-long freeze in the IPO market. They can also happen before fundraising or an initial public offering.
Here’s what you need to know if your company (or a third party) presents you with a tender offer.
What is a tender offer?
A tender offer is an opportunity for private company employees and existing shareholders to sell shares back to the company or to a third party. The tender offer will include a fixed stock price, the length of time the offer is available for, eligibility requirements, and other rules around the number of shares that could be sold. It is an opportunity for existing shareholders or employees with equity compensation to cash out some of their stock.
How do tender offers work? Tender offer rules
If you’re approached with a tender offer of your company’s stock, you’ll be given some standard information:
- Seller eligibility. Is the tender offer available to current employees, early investors, former employees, etc.?
- Offer price. This is a set price offered for employees and investors participating in the tender offer.
- Number of shares. There will be limits on how many shares the purchaser is willing to buy. This usually translates into a maximum number of shares each person can sell (which may be a percentage of holdings or a dollar amount).
- Share eligibility. Is the tender offer only available to common shareholders? Are vested unexercised stock options eligible? And if so, is the company able to facilitate a cashless exercise in conjunction with the sale?
- Window. Investors must have at least 20 days to respond to a tender offer. Find the expiration date of the offer. Also, try to glean any insights from your employer about the possibility of future tender offers.
Tax implications
Interested sellers should always consult a tax professional before accepting a tender offer. There are many tax considerations and nuances which can impact the outcome. But in general, the tax consequences are as follows.
Incentive stock options receive favorable long-term capital gains tax rates if they meet the qualifying disposition criteria. To qualify, you must hold your stock for at least two years from the grant date and at least one year after exercise. Everything else is disqualifying, and taxed as ordinary income and/or short-term capital gains rates depending on the circumstances.
Non-qualified stock options and restricted stock meet long-term holding periods one year after purchase. At exercise or purchase, the spread between the strike price and the value of the stock is taxable at ordinary income rates for federal tax purposes. If the shares are sold before the one-year mark, it will be a short-term capital gain.
Restricted Stock Tax Treatment
Who is offering to buy the shares?
Employees considering selling their shares should be aware that how the offer is structured can alter the tax implications. As a high level example, if a tender offer is considered a non-arm’s-length transaction by the company, it can be deemed compensatory. That means that if the buyback price exceeds the current market price (e.g. the 409a valuation), the excess may be subject to ordinary income tax, even if the shares would otherwise meet the requirements for long-term capital gains tax treatment.
The spread between your cost basis (likely the strike price of your options) and the fair market value of the shares would be taxed differently, depending on your holding period and the nature of your shares or options. In contrast, with an arm’s-length third-party tender offer, the entire gain above your cost basis in this example would be taxable according to your holding period and the nature of your shares or options.
Speak with your tax advisor and the company to find out more.
Do you have QSBS?
When criteria are met, qualified small business stock enables individuals to sell their shares tax free. Before deciding to participate in a tender offer, make sure you know if your stock qualifies and if so, your holding period.
Learn About Qualified Small Business Stock (QSBS)
Should I participate in a tender offer?
For private company employees, a tender offer can provide a significant liquidity event for funding other financial goals and needed diversification. But as with any financial decision, there are pros and cons, so it’s important to discuss your situation with your financial advisor and tax professional.
Here are some factors to consider when weighing your participation:
- Are you happy with the transaction price? If you stand to realize a significant gain because of an attractive share price offer, it has the potential to alter your financial situation for the better. But for relatively recent hires (or if the tender offer is a down round), it may make sense to wait if the paper profits aren’t materializing.
- Perhaps the primary downside of accepting a tender offer is missing out on some of the company’s potential future upside. But since sales are capped (meaning most investors cannot sell everything), it’s also a way to dollar-cost average out. There’s also no guarantee the stock price will only go up from here.
- How concentrated is your current stock position with the company? Diversifying private company stock can be very difficult, if not impossible, because of illiquidity. So any time employees and investors have the opportunity to take profits and diversify, they should consider it.
- Do you have plans to leave the company? If you quit, the company may be able to buy back your stock anyway. But unexercised stock options are at risk of forfeiture if you can’t exercise within the company’s stated timeframe, often three months. Participating in a tender offer could prevent this and possibly give you cash to exercise more shares.
- Get control over when you sell and for how much. Accepting a tender offer can put you in the driver’s seat to decide how much stock to sell and for what price. In contrast, if your company is sold, as an employee, you likely won’t have a say in the terms of the deal (cash vs stock) or purchase price. The market decides the price for public company shares.
- Control your tax situation. The relative rigidity of a tender offer also helps employees manage the tax impact of share exercises and sales. It also allows shareholders to work with their advisors to calculate the impact and make a plan before moving forward. Pick which shares to sell based on cost basis, capital gain tax treatment, or QSBS. Further, realizing significant taxable gains can also help avoid triggering the alternative minimum tax (AMT) on incentive stock option exercises, which may be another planning lever.
- Do you need the proceeds? Consider liquidity needs and financial goals. Do you need cash to fund a major purchase, college, or a retirement savings goal? If so, a tender offer could provide much-needed liquidity.
- When do your options or double-trigger restricted stock units expire? Stock options have a maximum 10-year window until expiry, or earlier if you leave the company. Double-trigger RSUs often have time and liquidity-based requirements, as well as an expiration date. For longtime employees with unexercised options or outstanding RSUs, a tender offer might be exactly what you need to avoid losing the stock. The company will likely be vigilant about how many shares you’re able to sell versus the quantity considered to meet the second triggering event (which is taxable as regular income). But you’ll still want to ask.
- Consider the tax impact. Paying ordinary income tax isn’t the worst thing. But shareholders should always make sure they aren’t triggering any tax event accidentally. This includes selling shares that would qualify for tax-free treatment under Section 1202 for qualified small business stock or exercised stock options on the cusp of long-term capital gains treatment when there’s likely another tender offer on the horizon.
Sudden Wealth & Equity Compensation Advisors
Ultimately, your decision to accept an offer to purchase your shares will be a personal choice. There are many relevant factors unique to your situation and goals that could make a tender offer a welcome opportunity for liquidity or something to ultimately decline. Consult your financial and tax advisors to discuss your situation and goals.
[Last reviewed June 2025]
