Navigating Tender Offers for Pre-IPO Companies

Your pre-IPO company just announced a tender offer – now what? 🤔

Let's break down what tender offers mean for employees, why they matter, and how to decide your next move. This post will cover: what tender offers are, pros and cons of participating, common misconceptions, and tips for making an informed decision.

What is a Tender Offer (and Why Should You Care)?

A tender offer is essentially a company-sponsored chance to sell some of your private stock for cash. In a pre-IPO (private) company, your shares are usually illiquid – you can’t just sell them on the market. A tender offer changes that by creating a (typically restricted) selling opportunity. In simple terms, it’s a liquidity event where existing shareholders can sell a portion of their shares to an approved buyer (often an investor, sometimes the company itself) at a set price, during a limited time window.

Why do tender offers matter? Because companies are staying private longer than ever, meaning an IPO or acquisition (the traditional liquidity events) might be years away. Employees who have been accruing stock or options for years (likely you...) typically want a chance to cash out some gains so they can use that wealth for other purposes.

Want to Try To Jump Straight to an Answer? Here's the TL;DR

>80% should probably participate. In the tender offers we have evaluated, we estimate that in more than 80% of situations we have recommended individuals participate, and sell the max allowed.

Sub-20% may not want to participate. In certain situations, not participating is the best choice. This is typically sub-20% of client situations we've assessed

Here's Why (in a simple flow chart):

You Likely Have Multiple Decisions To Make In A Tender Offer

(1) CAN you participate? Even if your current/former company is holding a tender offer, it doesn't mean that you will be able to participate (especially in full). Things like your vesting schedule, employee status, timeline, and equity compensation type you have all impact this

(2) SHOULD you participate? If you can participate, this is the bigger question. Answer it isn't easy, but it includes a mix of

• What are your financial goals? And how would tender process impact them?

• Investment/concentration risk. How much of your net worth is tied up in company stock?

• Tax implications. What is the tax impact of selling? And if you do sell, which shares should you select to optimize your tax impact?

HOW To Decide: Data & Frameworks

Every decision is personal. But in our experience, data and frameworks have been very helpful in helping individuals navigate the decision. A couple key ones are:

(1) Regret Minimization. We use this frequently with our clients in many financial situation; it definitely applies in tender offers. Basically, frame out both scenarios and let your feelings guide you

(2) Market Data (future success is a minority outcome). Data for pre-IPO situations is tricky to come by, but some does exist (as well as Post-IPO). Two data sources we have found/utilize for pre-IPO and recent-IPO are below. In both, the data clearly demonstrates that your company further increasing in price is a statistically unlikely outcome. Basically the returns of company investments (pre-IPO, recent-IPO, event he S&P500) are all skewed --> with the average pulled up by a small minority of big winners.

Could your company could definitely be one of those big winners? Absolutely. But you should know that the statistical odds of that are not favorable.

Watch Our Video for LOTS more on tender offers

30-40 Wealth Video: Tender Offers covers Items like:

• Key Decisions To Make

• Checklists/Data To Gather To Participate

• More Detailed Tax Strategy

• Things to Watch Out For

• FAQs?