Not all private company tenders are alike
Fast-growing companies are staying private longer, which helps foster innovation but can also present employee retention challenges. In an effort to keep talent, private companies looking to reward valued employees often initiate liquidity events, including tender offers.
Traditional tenders 101
A private company tender offer is a company-sponsored liquidity event that allows employees and other key investors to ‘tender’ or sell shares to an offeror(s) while a company is still private. This allows employees and early investors to exchange a portion of their shares for cash, though they have to agree to the pre-negotiated price that the offeror(s) fixes for those shares. These events often follow a company’s VC fundraising round.
When a CFO, for example, puts together a traditional private company tender offer, she might first assess how much equity employees and investors will be able to sell. A typical tender may allow equity holders to sell up to 5 or 10% of their shares, for instance. Then, the CFO would identify an investor they’d like to work with, and negotiate and settle on a set price with that investor, which is typically discounted 20 to 30 percent. Employees – or any eligible seller (non-employee founders, early stage investors, employees, etc.) – then transfer a subset of their shares to the investor in exchange for cash valued at the pre-negotiated price.
Due to lack of technology, traditional private company tenders have limited a company's capabilities to offer the optimum solution for their employees, the companies and the investing community. For organizations that want their employees and investors to receive the best price possible, it may be time to consider a new format.
Benefits of a modern marketplace
Because of advancements in technology platforms and the evolution of the private market, more options for running customized liquidity programs are now available, including those that enable an auction mechanism. Instead of the CFO selecting one investor to participate, they would take a portion of the common stock from their employees, put it on a modern marketplace for investors to bid, and select the investors that bid the highest amounts.
This methodology allows a broader pool of people to benefit – employees cash out at a higher price, multiple investors can participate in the offer, and companies gain insights into market-based pricing to ensure their workforce is receiving the best offer.
Maintain control of the cap table
Executives interested in alternatives for customized liquidity programs also don’t have to forfeit control over their cap table. When leveraging the auction mechanism on a modern marketplace, they’re able to set parameters and criteria around who can invest in the offer, providing control from start to finish.
Custom liquidity programs provide all the benefits of a traditional tender and can result in better pricing. Employees will feel supported, investors are incentivized to participate, and companies maintain control over their cap tables.
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The information and material presented in this article is provided for your informational purposes only and does not constitute an offer by Forge Global, Inc., Forge Securities LLC or any of its affiliates (collectively, "Forge") to sell, or a solicitation of an offer to buy any securities and may not be used or relied upon in connection with any offer or sale of securities. An offer or solicitation can be made only through the delivery of final offering document(s) and purchase agreement and will be subject to the terms and conditions and risks delivered in such documents.
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Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.