Tender Offers and Your Equity Comp: What to Consider if Your Private Company Presents a Liquidity Event

Generally speaking, a tender offer refers to a bid or offer to purchase shares of a corporation. In terms of equity compensation, a tender offer can refer to an organized transaction that allows shareholders of private company stock to sell before an initial public offering (IPO).

A tender offer creates a short-term liquidity event for private employees, who otherwise may not have much choice or control over selling their company stock (since it’s not traded publicly on the market yet). It is a single, limited event where employees may choose to sell their shares. However, once the offer period has passed, the company stock shares become illiquid again.

This is why it is so important, if you own shares in a private company, to seriously consider participating in a tender offer. It may, in fact, be the only chance you ever get to sell shares and turn company stock into actual cash.

When Does a Tender Offer Usually Occur?

Tender offers most commonly occur in late-stage start-ups and private companies. These companies have had time to grow and accumulate significant value, meaning longtime employees are more likely holding onto valuable equity with no ability to take action. IPOs or mergers and acquisitions (M&As) take time—and they can be delayed or disrupted for any number of reasons. A tender offer can help employees tap into the liquidity they’ve accumulated in the meantime.

Now this begs the question…

If your late-stage private company presents a tender offer, what’s the right move to make for your immediate and long-term financial well-being?

Does it make sense to hold onto your shares and hope for a share price increase post-IPO, assuming an IPO actually occurs? Or, does it make sense to participate in the tender offer and convert some of your shares into cash (while diversifying your positions in the process)?

Let’s walk through these considerations together.

Next Steps: What Should You Do If Your Company Is Tendering Shares?

Let’s assume your company announces tomorrow that a tender offer is being presented to all employees with shares of company stock. You’ve been with them since early start-up status, and now as a key employee who holds significant equity, you’re faced with an important decision.

Your first move should be simple enough—gather up all the documents and ask all the questions necessary to make an informed decision.

You should have a solid understanding of how many shares you’ll be able to tender. While you may have the option (in rare cases) to tender all your shares, many employees opt to maintain some percentage of company stock (especially if an IPO is the ultimate goal). The other important factor? The value of your shares. How much is the offeror willing to pay per share?

With this information, you may next want to reach out to your advisor. Together, you can run through some scenario planning based on whether you decide to sell and how many shares you sold. Your advisor should be able to provide you with an updated net worth projection and tax liability projection, as well as take a look at your portfolio’s overall diversification.

Selling shares during a tender offer not only impacts your liquidity, but it can also help  shift your portfolio  away from being too concentrated in your company’s stock.

Weighing the Pros and Cons of Participating in a Tender Offer

To what extent should you participate in a tender offer? It’s an important question to ask yourself, and you should weigh the potential benefits and drawbacks of doing so before making your final decision.

Perhaps the most obvious benefit of participating is that you’ll be able to turn some of your company equity into cash. It’s possible this tender offer is the first time you’ve been given an opportunity to take advantage of a liquidity event, and you don’t know when another will come by again soon.

A tender offer can even be exhilarating for longtime employees of a start-up or private company—for possibly the first time, a dollar value is being placed on equity that’s otherwise felt unreal or illusory.

If you’ve been waiting for your company to IPO or waiting for another liquidity event before making a major purchase or decision, a tender offer could be the moment you’ve been waiting for. With the funds earned through a tender offer, you may be able to pursue goals or purchases you’ve been waiting on—buying a house, investing in a friend’s business, buying a boat or luxury vehicle, you name it.

All of that said, there are potential downsides to take into consideration.

First, the most basic principle of investing is important to remember here. You cannot predict the future, and selling your shares now means missing out on future potential growth—as is the case with any investment you participate in. The value of your company’s stock could very well skyrocket after an IPO. Or, it could drop significantly, well below what you sold shares for during the offering period.

The future is not guaranteed either way, which is why it’s important to focus on how you feel about the tender offer’s valuation in relation to your own portfolio and goals. Thoughts of whether the value will go up or down in the future are irrelevant, and they can lead to emotionally driven decision-making or dissatisfaction with your decision over time.

The most important factor isn’t whether you think the value of the stock will never rise higher than it is now, but whether now is the right time for you to convert some of your equity into cash.

Another downside to consider? The potential tax consequences of selling your shares. Selling during a tender offer may be less tax-efficient, depending on a few key factors.

Considering the Tax Treatment of Your Equity Compensation

We provide multiple articles on taxes and equity compensation in our catalog, but since it’s an important consideration during a tender offer, we want to reiterate the tax consequences here as well.

However, if you’d like to take a deeper dive, here are some additional tax-related resources:

• A Quick Take on the Tax Treatment of Incentive Stock Options
• The Basics of How Non-Qualified Stock Options are Taxed
• What to Do When Your Restricted Stock Units Vest

Let’s take a look at how a tender offer may impact your tax bill based on the type of equity compensation you have:

Incentive Stock Options (ISOs)

Let’s say your ISOs have not been exercised yet, but you choose to exercise and sell shares as part of the tender offer. You’ll have a disqualified disposition, and the bargain element will be taxed as ordinary income. Additionally, there is no AMT adjustment.

If you previously exercised and held your ISO shares (at least two years after the initial grant date and wait to sell until one year after they’ve been exercised), selling the shares as part of the tender could be considered a “qualified sale.” A qualified sale is taxed at the more favorable long-term capital gains rates (which are capped at 20%). This is compared to short-term capital gains rates, which mirror your ordinary income tax rate, up to 37% in 2025. This may also potentially lead to a negative adjustment for determining the AMT Credit.

Non-Qualified Stock Options

Non-qualified stock options (NQSOs) are taxed as ordinary income at exercise. Assuming NQSOs are tendered and go through an exercise and sell, the bargain element will be included as ordinary income, tax will be withheld at a supplemental rate, and the net  cash will be deposited into the designated bank/account.

Restricted Stock Units

Restricted stock units (RSUs) that are vested and delivered are taxed as ordinary income on the full value of the units. It’s possible, as part of the tender, that some of your RSUs may vest (particularly if this is part of a double trigger event). Shares that vest and are sold as part of the tender will likely only incur ordinary income tax.

If previously vested units (now stock shares) are sold during the tender offer for a higher price than they vested for, you may be required to pay capital gains tax on the difference. Again, the capital gains tax rate will depend on how long you held  the shares between vesting and selling.

Stock Owned Outright

Generally speaking, for any company stock you own outright (for example, stock options you’ve previously exercised and held), you will be liable for paying short- or long-term capital gains tax on recognized gain.

Depending on several factors that you and your advisor can discuss in more detail, you may be responsible for some additional tax liability or incentives. For example, the Net Investment Income Tax (NIIT) is an additional 3.8% tax on capital gains, which applies to those with a modified adjusted gross income above certain thresholds. For 2025, the threshold is $200,000 for single filers and $250,000 for joint filers.

Or, if you own shares of qualified small business stock (QSBS), you may be able to enjoy tax-free capital gains for shares held five years or longer. Keep in mind the IRS has fairly stringent requirements for QSBS, which you can find here.

Another important consideration for those with ISOs is determining AMT payments and credits—or whether an AMT adjustment needs to be reported. This is something your financial advisor or tax professional can help you navigate, but here’s an article on managing AMT with ISOs to review in the meantime.

Planning for the Proceeds of Your Tender Offer Sale

Say you do choose to participate in the tender offer. Eventually, you’ll find yourself with the sale proceeds, and you’ll want to be thoughtful and strategic in how you decide to leverage that cash to either diversify your portfolio or fulfill a financial goal.

A few common considerations include:

1. Planning for additional tax due
2. Paying off/down debt
3. Investing for the future
4. Having fun

Planning for Taxes

It’s typically prudent to set some funds aside for the additional tax liability you can expect to see on your tax bill. Actions taken during a tender are taxable events and may result in a higher taxable income and a more complicated tax return. This is why projecting the tax consequences of a tender offer is critical, so you can make sure you’re making the appropriate amount of estimated tax payments, planning around prior year safe harbors, and otherwise doing what you need to in order to avoid tax penalties or debt.

Paying Down Debt

This could be an opportune time to pay down any high-interest consumer debt you may have been accruing (think personal loans or credit cards). You may also want to weigh the pros and cons of paying down other loans, say a mortgage, a child’s student loan debt, or a car loan. However, if the interest rate is low enough, you and your advisor may find it more advantageous to reinvest that capital into the markets (since the potential returns could outweigh the interest accrued).

Investing for the Future

Investing some or all of the proceeds from the tender for the future is often a good idea. After all, the proceeds are coming from a single stock position that was invested, so putting them into the markets for a future need (i.e. retirement or financial independence) often makes sense. Doing so can also help you diversify your portfolio, which may have been overconcentrated in employer stock up until now.

How to invest and what to invest in, is something you’ll want to work with your advisor on.

Having Fun

And finally, cashing out via a tender might be a once in a lifetime experience. If you find yourself in a strong financial position and want to take a portion of your proceeds to fulfill a personal or family fun item, it may be okay to think about how you could use the cash to better your life. This could mean buying a new home for your family, taking a once-in-a-lifetime trip, paying for a child’s college education, or something else that’s meaningful to you.

Post-Tender Considerations

After the dust settles and you’ve successfully sold some of your shares, it’s important to review what happened and plan your next steps for the rest of the year (and the years following, for that matter).

For example, this liquidity event may mean you’ve found yourself in a high-income year. If you have ISOs, it might make sense to exercise and hold more of them in an effort to mitigate AMT. Or, if you’re charitably inclined, you may want to work with your advisor to contribute to a donor-advised fund or leverage other charitable strategies to mitigate income tax.

What Will You Decide if a Tender Offer Is Made?

While it comes with plenty of considerations, a tender offer is also an exciting opportunity to see your hard work and loyalty to a company pay off. If you believe a tender offer may be coming, or you’ve recently been presented with, we highly recommend reaching out and speaking with a knowledgeable advisor as soon as you’re able.

Want to get in touch with our team at the Zajac Group? Schedule an introductory call today. We look forward to learning more about how we can help you ensure your equity compensation aligns with your greater financial goals and well-being.

This material is intended for informational/educational purposes only and should not be construed as investment, tax, or legal advice, a solicitation, or a recommendation to buy or sell any security or investment product. The information contained herein is taken from sources believed to be reliable, however accuracy or completeness cannot be guaranteed. Please contact your financial, tax, and legal professionals for more information specific to your situation.