Fast-growing companies are staying private longer, which may help 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
So, what is a stock tender offer? A private company tender offer is a company-sponsored liquidity event that typically allows some or all employees and other key investors or shareholders to ‘tender’ or sell shares to an offeror(s) while a company is still private. This allows employees and early investors to sell a portion of their shares for cash, though they have to agree to the specified price that the offerors fix for those shares. These events often follow or happen at the same time as a company’s VC fundraising round.
When a company, for example, puts together a traditional tender offer for a private company, it might first assess how much equity employees and investors will be able to sell.
There are two components that a private company needs to consider. These are:
Partial or Full Liquidity
A typical tender may allow equity holders to sell up to 5 or 10% of their shares, for instance. Then, the company would identify an investor they’d like to work with, and negotiate and settle on a set offer 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 vested shares to the investor in exchange for cash valued at the pre-negotiated price.
In this instance, the company may decide to control the whole transaction. This includes choosing participants, price, frequency, and more.
Due to lack of technology, traditional private company tenders limited a company's capabilities to offer the optimum solution for their employees, the company, and the investing community. For organizations that want their employees and investors to receive the best liquidity opportunities 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 company 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 may allow a broader pool of people to benefit – employees cash out at a potentially 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 still able to set parameters and criteria around who can invest in the offer, providing control from start to finish like in a traditional private tender offer.
Custom liquidity programs provide all the benefits of a traditional private tender offer and can result in better pricing. Employees will feel supported, investors are incentivized to participate, and companies maintain control over their cap tables.
Visit Forge’s solution to learn more about our integrated platform for private, high-growth customized company liquidity programs.