Should You Sell in a Tender Offer or Wait for the IPO?
Private companies are staying private longer. For employees with equity compensation, this can create a challenge. Without a liquidity event, they may be unable to access the value of their equity and may need to wait years before converting it into cash. In response, some private companies have begun conducting tender offers as a source of liquidity. SpaceX, prior to its IPO, and OpenAI are recent examples of companies that have provided employees with periodic tender offer opportunities.
A tender offer is a company-sponsored liquidity event that allows employees and other shareholders to sell a portion of their shares. For employees, tender offers provide an opportunity to access liquidity, diversify concentrated wealth, and fund personal financial goals without waiting for an IPO or acquisition. For companies, tender offers can help improve retention and reduce pressure to pursue a public offering before management believes the business is ready.
Companies often limit the amount of stock employees can sell, establish a fixed purchase price, and offer participation only during a specific enrollment period. As a result, tender offers may provide partial liquidity rather than allowing you to fully cash out your company equity.
It can help to keep the core decisions in mind. Participating in a tender offer means exchanging a portion of your existing equity for cash today. In return, you give up the potential appreciation associated with those shares if the company ultimately completes an IPO or is acquired. At its core, the choice is between a known share value today and an unknown, possibly larger or smaller, value later.
When deciding whether to participate in a tender offer, consider the percentage of your net worth tied to company stock, your liquidity needs, and your expectations for your company’s future.
Consider Your Concentration
One factor to consider is the percentage of your net worth represented by company stock. Suppose your equity at a large private company, such as OpenAI or Databricks, represents 80% of your net worth. Your salary also comes from the same company. In that situation, both a significant portion of your wealth and your employment income are tied to a single company. While concentrated positions can create substantial wealth when a company performs well, they also increase the impact that any adverse outcome can have on your financial situation.
A useful thought experiment is to consider what would happen to your financial situation if the value of your equity declined significantly or became worthless. If you’re young, have minimal financial responsibilities, and have a long career ahead of you, there may be more time to recover from a loss like this. Similarly, if you’ve already reached financial independence and your equity represents additional wealth on top of an already strong financial foundation, it may be reasonable to maintain a concentrated position. Many employees fall somewhere between these two situations, and the value of their equity plays an important role in keeping their financial goals on track.
Selling shares in a tender offer can provide an opportunity to reduce your concentration. By selling a portion of your shares and reinvesting the proceeds elsewhere, you can diversify across a broader range of investments rather than relying on the success of a single company. Diversification does not eliminate risk, nor does it maximize potential upside. Instead, it reduces your dependence on the outcome of any one company and can create a more balanced financial picture. For many employees, particularly as the value of their equity grows, that trade-off is worth considering.
Weigh Your Liquidity Needs
Another factor to consider is whether you need liquidity for other areas of your financial life.
Not only can a concentrated position in a single company increase investment risk, but it can also be an illiquid asset that may not be accessible when you need it most. Short-term liquidity needs might include paying down debt, building or replenishing an emergency fund, or covering an unexpected expense. You may also be planning for larger expenses, such as purchasing a home, buying a vehicle, or saving for education expenses for your children. Beyond specific financial goals, you may simply value the flexibility that liquidity provides, whether to pursue a career change, navigate a period of uncertainty, or reduce financial stress around major life events such as marriage or relocation.
Assess Your Company’s Future
The stage of your company, and your expectations about its future, may influence the appeal of a tender offer. If the company is still an early-stage startup, you may prefer to take advantage of one of the first opportunities for liquidity and lock in some certainty. At a more mature company, your decision may depend less on the company’s age and more on the likelihood of a future liquidity event. If there is no clear path to an IPO, acquisition, or other liquidity event, the tender offer may become more compelling. The decision becomes more interesting if you receive clear signals from management that an IPO or acquisition may be imminent.
If an IPO is coming soon, it may seem natural to forgo a tender offer and retain as much of your equity compensation as possible. However, some employees may choose to participate in a tender offer for a different reason: to create liquidity they can use to exercise and hold additional stock options.
Stock options may create significant out-of-pocket costs at a private company because employees generally cannot access the value of the underlying shares to cover exercise costs or any resulting tax liability. Incentive stock options (ISOs), in particular, have unique tax characteristics that can make exercising and holding shares attractive in certain situations. Another potential benefit of exercising stock options is beginning the holding period required for qualified small business stock (QSBS) treatment, assuming the shares otherwise qualify.
Rather than reducing exposure to the company, this strategy effectively redeploys a portion of existing equity value into additional equity ownership. This is an aggressive planning strategy that requires careful analysis, cash flow projections, and an understanding of the associated tax and investment risks to ensure you do not stretch your finances too thin. If it works as intended, it may affect the long-term after-tax outcome of your equity compensation by allowing you to take advantage of favorable tax treatment available to certain types of equity awards.
Make the Choice That Fits Your Plan
As companies stay private longer, tender offers will likely become an even more common feature of equity compensation. The decision to participate depends on your personal financial situation, your exposure to company stock, your need for liquidity, and your expectations for the company’s future. For some employees, participating may provide an opportunity to diversify risk, strengthen their financial foundation, or progress toward other financial goals. For others, maintaining their position may remain an option worth considering if they have sufficient liquidity and remain confident in the company’s long-term prospects.
I work with technology professionals on questions like these. If you’re considering a tender offer, you can schedule a complimentary consultation with me directly.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Michal A. Zyla
Financial Advisor
CFP®