Equity can be powerful recruitment and retention tool, as well as a meaningful part of a startup employee’s total compensation. However, equity alone may not satisfy the needs of shareholders, particularly those that have held onto their options for several years. This is where tender offers can help a company strategically align the incentives of those shareholders with the company’s long-term growth plan. In some cases, this might mean delivering partial liquidity to existing shareholders; in others, it might mean removing shareholders from the cap table entirely.
At a high-level, a private company may design their tender offer to achieve one or more of these goals:
Reason #1: Attract and Retain Employees
Running a tender offer gives employees a path to liquidity, which can make their equity feel more tangible. In an increasingly competitive employment landscape, if employees know that they will have an opportunity to cash out at least some of their hard-earned equity, it may help motivate them to stay with the company longer. In fact, some companies choose to conduct periodic tender offers for their employees to help strengthen the culture of their equity ownership.
Of course, companies may be concerned that offering liquidity will cause employees to cash out and leave. This is why companies that leverage the Shareworks platform sometimes limit current employees to selling no more than 20% of their total vested holdings.
Reason #2: Consolidating Secondary Activity
In recent years, secondary marketplaces and exchanges have begun to allow individuals and institutions to buy stock direct from private company employees. These transactions can be problematic if they are conducted without the company’s knowledge or express permission – even for companies that have right-of-first-refusal (ROFR) policies in place. Companies may lose track of who owns their stock and the price it is trading at, which may impact their next 409A valuation.
Conducting a private company tender offer can help minimize unauthorized secondary activity by providing a company-approved path to liquidity for shareholders. By controlling the process, the company can maintain oversight over the trading activity, as well as control the flow of information and pricing disclosures. At the end of a tender offer, the company knows who owns what stock so that their cap table can accurately reflect the new shareholder list.
Reason #3: Making Space in the Cap Table for Value-Add Shareholders
As a private company’s cap table expands, founders and CFOs may want to remove shareholders that are no longer aligned with the company’s growth. This might include former employees or early investors that still own equity but are not necessarily invested in the company’s long-term success. A company may be able to issue new equity to shareholders during their next financing round, but this can cause dilution of the total equity pool.
With a tender offer, a company can simultaneously remove and replace misaligned shareholders with shareholders that will help the company grow. Since that equity is being transferred and not issued, it won’t have a diluting impact on the total equity pool.
Ready to learn more? Download the Private Company Liquidity 101: A Guide to Running a Tender Offer here.