Helping Employees Navigate Some Financial Implications of a Tender Offer

At some point, private companies that offer their employees equity-based compensation may face a quandary: how to turn their employees’ paper wealth into real money. If an IPO or company acquisition are in the works, the infusion of capital will generally allow employee shareholders to cash out. In other cases, however, it may fall to the company to schedule a liquidity event, such as a tender offer.

A tender offer, sometimes called a buyback, is a type of secondary transaction where existing holders of private company shares sell them back to the company or to outside investors. Usually, a tender offer applies only to a limited number of available shares.


Since tender offers are only open to employee shareholders, they may help to foster a culture of ownership while encouraging employee retention. This may make them momentous events in a private company’s lifecycle.


Yet sometimes, one of the most critical times in the employee tender offer process is what comes immediately after it. With cash or shares in hand, your employees may be left with questions such as: How will I be taxed on the proceeds of my sale? What happens to the rest of my holdings? What should I do with the money I receive from the tender offer?


Ideally, employees will consult a tax or financial advisor prior to participating in a tender offer to get answers to these questions and more. After all, tender offers can be complex and individual tax and financial situations can change significantly once employees actually receive their proceeds. That said, employers may have a role to play in helping employees answer some of their questions about tender offers in a quest to promote a healthy equity ownership culture.


Calculating the Tax Bill

A question that commonly arises in the wake of a tender offer relates to its tax implications. While the tax implications of various equity holdings are very complex, at the completion of the tender offer, every employee should have a clear understanding of how their proceeds will be taxed (as ordinary income, or short- or long-term capital gains taxes), whether they will need to pay an Alternative Minimum Tax (AMT) and if the proceeds from their sale push them into a higher marginal tax bracket.


One way to convey this information at a high level is by preparing an information package to share with employees. At the same time, it may be a good idea to bring in a tax or financial professional to communicate all of this to employees prior to the tender offer. If your employees still have questions after that, consider providing additional resources or access to a Certified Professional Accountant who can help them map out their tax obligations and complete the forms necessary to report the sale or exchange of capital assets on their tax returns. Tax and financial professionals can also walk employees through options to potentially lower their overall tax bill, such as through charitable giving or leveraged gifting to a family member.

Planning Their Next Big Financial Event

Some employees may already have plans for how they want to spend the proceeds from their equity sale: for example, purchasing a home, paying off student loans, etc. Others may want to know how to preserve or grow that money over time through an investment portfolio.


In either situation, providing your employees with helpful resources, or one-to-one guidance with a financial professional, can help them get the most out of their tender offer participation. Particularly for younger employees, a tender offer may be the first significant financial event in their adult lives. As an employer, it is in your interest to keep them focused on their long-term financial health and remind them of how your company helps to support it.

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