Private companies often operate under the assumption employees will wait years—sometimes up to a decade—for an initial public offering (IPO) or acquisition to realize value from their equity. However, a growing number of mature private companies are now implementing tender offers where employees can sell vested shares before a traditional exit event. These events provide early liquidity to loyal staff, but are they a strategic advantage or a costly distraction?
How Does a Tender Offer Work?
Tender offers allow employees to sell some of their vested shares to outside investors or back to the company itself. Unlike traditional exit events, these programs provide partial liquidity while the company remains private.
These offerings typically happen annually or biannually and are structured as optional programs, meaning employees can choose to participate or hold shares for a future exit. Companies usually set participation limits, often allowing employees to sell 10-20% of their vested equity in each offering.
The buyers are typically late-stage investors, private equity firms, or the company itself. The purchase price for shares is usually set at the company's current 409A valuation or a recent funding round valuation, sometimes with a small discount.
What are the Benefits of Tender Offers?
Employee Retention and Recruitment
The most compelling argument for a tender offer is to gain a competitive advantage in the market for talent. As companies stay private longer, employees become frustrated with equity that can’t be sold. They know their equity has value, but it can’t be realized. Offering partial liquidity can differentiate your company from competitors and reduce the pressure for premature exit events.
Reduced Exit Pressure
Once employees have opportunities to realize some value from their equity, they're often more patient about the timing of an exit event, such as an IPO or acquisition. This allows companies to optimize their exit strategy rather than moving fast to satisfy employees. In the long run, this should lead to better outcomes for all.
Improved Financial Wellness for Employees
Equity-heavy compensation can create financial stress, particularly for employees who have accumulated significant paper wealth but struggle with cash flow for major life events like home purchases, medical expenses, or children's education. Tender offers provide financial flexibility without requiring employees to leave a company.
Demonstrated Commitment to Employee Success
Implementing a tender offer signals that a company genuinely cares about employee financial outcomes beyond just on-paper valuations. This goodwill can improve culture, loyalty, and overall employee satisfaction.
Validation of Company Value
When sophisticated investors participate in tender offers at current valuations, it provides external validation of the company's worth. This can boost employee confidence and serve as a useful data point for future fundraising events or exit planning.
What are Potential Drawbacks of Tender Offers?
Administrative Complexity and Cost
Tender offers require significant legal, administrative, and compliance work. Companies need to manage investor relations, legal documentation, tax implications, and often complex regulatory requirements. The process can consume substantial management time and resources, especially when launching a tender offer for the first time.
Dilution Without Raising Capital
Unlike primary fundraising efforts from venture capital firms, tender offers don't bring new capital into the business. If the company itself purchases shares, it actually uses cash that could otherwise fund growth. If outside investors purchase shares, it can complicate the cap table and future fundraising dynamics.
Uneven Employee Participation
Tender offer programs can create internal equity issues among employees based on their financial situations, tenure, or understanding of the program. Senior employees with more vested equity may benefit disproportionately, while newer or lower-level employees may see limited benefit.
Potential Tax Complications
Tender offer transactions can trigger complex tax implications for both the company and participating employees. Depending on the structure, there may be issues with restricted shares, incentive stock option (ISO) treatment, 409A valuations, or other regulatory considerations that require careful planning. It is a good idea to pair tender offers with relevant tax advice services for employees so people can make sound decisions.
Signal Risk to External Stakeholders
Some investors or stakeholders might interpret tender offers as a sign the company lacks confidence in future value creation or is under pressure from employees to provide liquidity. This could potentially impact future fundraising or strategic discussions.
Reduced Long-Term Alignment
When employees can regularly monetize portions of their equity, it may reduce their long-term commitment to the company's success. The "golden handcuffs" effect of illiquid equity diminishes when employees have already captured significant value from tender offers.
Is a Tender Offer Right for Your Company?
Tender offers work best for companies that can answer "yes" to most of these questions:
- Has your company been private for 5 to 7 years, or more, with significant employee equity accumulation?
- Do you have a stable, mature business model with predictable cash flows?
- Can you afford the administrative costs and management distraction?
- Are you experiencing retention challenges related to equity illiquidity?
- Do you have cash on hand or access to investors interested in purchasing employee shares?
- Is your expected time to exit still 2 or more years away?
- Can you implement the program fairly across your employee base?
Considerations for Implementing a Tender Offer
Program Structure
Most successful tender offers limit employee participation to 10-20% of vested equity per offering, with some companies implementing cumulative limits over time. This provides meaningful liquidity while preserving long-term alignment between employees and company goals.
Pricing and Valuation
Companies typically use recent 409A valuations or funding rounds, sometimes with modest discounts, to set offering prices. Developing a transparent pricing methodology will help maintain employee trust and participation.
Frequency and Timing
Once the door is opened to tender offers, annual or biannual offerings seem to work best, providing regular opportunities for employees to participate without creating excessive administrative burden. Timing around major company milestones or performance periods can help align the program with business outcomes.
Eligibility
As more companies experiment with front-loaded vesting schedules for new hire grants and boxcar equity programs, it's important to set minimum tenure requirements (often 1 to 2 years) for tender offers. Additionally, companies may have different participation levels based on role or seniority. Overall, clear, consistent, and fair eligibility criteria help companies avoid internal equity issues.
Communication and Education
The overall prevalence of tender offers is low, so most employees will be unfamiliar with the concept. For this reason, successful programs require extensive employee education about tax implications, program mechanics, and strategic considerations. Many employees will need guidance on whether and how much to participate.
The Bottom Line
Tender offers are a sophisticated equity compensation play, which acknowledge the realities of extended private company lifecycles. They work particularly well for mature, well-funded companies with patient capital strategies and employee bases that have accumulated significant equity value.
However, tender offer programs aren't appropriate for all companies. Early-stage companies, those with tight cash positions, or organizations planning near-term exits may find that the costs and complexity of a program outweigh the benefits.
The key is matching your liquidity strategy to your company's specific situation, employee needs, and long-term objectives. When implemented thoughtfully, tender offers can be a powerful tool for talent retention and employee satisfaction. When poorly executed or inappropriately timed, they can create more problems than they solve.
Like any equity strategy, the goal should be aligning employee interests with long-term company success while acknowledging the legitimate financial needs of your team. Tender offers can be an excellent way to achieve this balance, but only if your company has the resources and commitment to implement them properly.
Alex is the General Manager for Pave's Market Data product and the firm's Vice President of Marketing and Strategy. He has more than two decades of experience in total rewards, including 10 years working at Aon plc developing, commercializing, and marketing the Radford Survey platform.
