Private company tender offers: How do they work and why they occur?

What is a private company tender offer?

When you hear the term "tender offer," you might think someone's suggesting a juicy steak or giving you a heartfelt choice. But in the context of investments, a classic tender offer is a request to buy a chunk of stock from existing shareholders.

A tender offer might come from a third party, such as an investment fund, or a company might put out a tender offer to buy back its own shares. Each relevant shareholder or bondholder then has the option to tender their shares. In many cases, the entity making the tender offer will buy at a premium to fair market value to entice sellers.

Sometimes tender offers occur at publicly traded companies, such as if an activist investor wants to buy a large equity stake in a company; to do so, they might need existing shareholders to sell some of their shares. Or a tender offer for a public company might be used to take a company private.

But tender offers can also be used at a private company, such as if an investor wants to acquire a stake in a company. This can happen either 1) as part of a primary fundraising round, where an investor acquires a stake in the company by buying new stock issued by the company in the primary round and simultaneously purchases stock from existing employees and/or shareholders; or 2) through a stand-alone tender offer (with no primary round) where the investor just purchases from existing employees and/or shareholders.

Or, a private company might issue its own tender offer to offer liquidity to employees and/or investors by buying back their shares.

How does a private company tender offer work?

To start, the purchasing investor(s) and the company (or just the company if only the company is buying back the shares) determine the framework of the tender offer. After finalizing the terms, the company sends a notice to all employees and/or shareholders eligible to participate in the tender offer. This notice, also known as the offer to purchase, will generally include information such as:

Offer to purchase date

This date, also known as the offer date or commencement date, is when the tender offer starts.

Expiration date

The tender offer generally isn't an ongoing solicitation. Instead, it runs for a set period with an expiration date. Tender offer rules generally require at least 20 business days. If the offeror doesn't get what they're looking for by the expiration date, the tender offer might end, or the buyer and/or company might extend the expiration date.

Settlement date

This date is when the buyer(s) formally purchases all shares tendered during the offering period and delivers cash proceeds to the sellers.

Tender price

A tender offer has a set price at which the buyer will purchase the stock. This price per share can be determined on a variety of factors, including the buyer's review of the company's historical and projected financial performance, valuations attributed to company peers/competitors and the price per share paid by past investors for the company's stock.

Amount being purchased

The offer to purchase also sets forth the number of shares being purchased. Sometimes a tender offer is to purchase a specific amount of shares, whereas other times it can be set as a range. In addition, a buyer might also negotiate the right to purchase additional shares in the event sellers tender more shares during the offering period than the buyer originally committed to purchase.

Eligible participants

The offer to purchase also dictates who is entitled to sell shares in the tender offer. For example, it might be limited to only founders and executive-level employees, or broadly opened up to all current and former employees.

What rules govern private company tender offers?

Private company tender offers are subject to federal securities regulations, including SEC Regulation 14E. One of the core requirements is that a tender offer must remain open for a minimum of 20 business days, giving shareholders adequate time to review the terms and make an informed decision.

Shareholders also have the right to withdraw tendered shares at any point before the offer expires. If the buyer changes key terms such as the tender price or the number of shares being purchased, the offer must generally be extended by at least 10 additional business days. These provisions are designed to protect sellers from high-pressure tactics and ensure a fair process for all eligible participants.

Tax implications of selling in a private company tender offer

Selling shares through a tender offer typically triggers a taxable event. The tax treatment depends on factors such as the type of equity (e.g., incentive stock options, non-qualified stock options or qualified small business stock), the holding period and how the offer is structured.¹

In some cases, proceeds are taxed as capital gains. In others, particularly when the transaction is treated as compensatory by the company, sellers may owe ordinary income taxes at higher rates.² Because the facts and circumstances vary, shareholders should consult a qualified tax advisor before deciding to participate.

Why participate in a private company tender offer?

Deciding whether to participate in a private company tender offer depends on the facts and circumstances of the offer and your situation. For those making the tender offer, there can be many motivations, like acquiring equity in a company that might otherwise be hard to acquire for investment purposes. A company might also want to buy back shares to regain more of an ownership stake.

For sellers, the choice depends on what makes sense for your finances. For holders of private company securities, a tender offer can be a liquidity event. If you've an employee that has exercised your stock options in anticipation of an IPO, a tender offer may provide a more timely liquidity option. Early investors might also be looking for liquidity and would be willing to sell if a tender offer comes along.

A tender offer isn't the only path to liquidity. The secondary market offers another way for shareholders to sell private company shares, subject to factors such as buyer availability and transfer restrictions. Forge's marketplace connects shareholders with potential buyers and provides pricing data to help inform decisions. Create an account to explore your options.