A tender offer is a type of secondary transaction where existing holders of private company shares sell them back to the company or to outside investors at a predetermined set price. The company is responsible for the eligibility criteria, which establishes who will be permissioned to sell. Eligible participants will then have 20 business days to review applicable disclosures and determine if they would like to make an election.
Tender offers can support a variety of desired outcomes, such as granting liquidity to support employee retention, bringing on new investors while minimizing equity dilution, or avoiding the issue of expiring options for companies that choose to stay private longer. A key benefit of private company liquidity is that it can help foster and develop a culture of ownership while supporting long-term employee retention.
One of the most critical times in the employee tender offer process is what happens immediately afterward. With cash or shares in hand, employees or participants 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 and other questions related to their finances. However, employers may also have a role to play in helping employees answer some of their questions about tender offers.
Calculating the Tax Bill
Tender offer participants often wonder about the tax implications of the transaction. While the tax implications of various equity holdings are complex, the taxation framework for the transaction is typically detailed in the Offer to Purchase that eligible sellers can review during the 20-business day window. Upon completion of the tender offer, every employee should have an understanding of how their proceeds will be taxed (as ordinary income, or short- or long-term capital gains taxes), and if the proceeds from their sale push them into a higher marginal tax bracket.
To help employees understand the tax implications of a tender offer, companies might consider preparing a high-level tax information package and/or bringing in a tax or financial professional to talk with them during the tender offer. If employees still have questions after that, companies might 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.
