Private company tender offers (“tender offers”) have come a long way since 2009. That’s when Digital Sky Technology (“DST Global”) purchased $100 million in stock back from Facebook employees back in 2009, which was considered the first major liquidity event by a venture-backed private company.
It certainly was not the last. Today, hundreds of venture-backed private companies conduct tender offers every year, allowing their employees to liquidate a portion of their equity through an organized process. So far in 2020, Shareworks has managed over $3 billion in tender offer transactions.
To learn more about how private company liquidity events have evolved, we spoke with Cameron (“Cammy”) Contizano, a partner at Goodwin Procter and a member of their Private Equity group. Cammy has worked in the private company tender offer space for over a decade, having represented both issuer companies and investors – including DST Global in that first groundbreaking liquidity event.
Below is a transcript of our conversation with Cammy (lightly edited for brevity):
Q: How did you first get into the tender offer space?
I started out in the tender offer space as a first-year associate at Goodwin in 2008. We received a call from a large institutional investor looking to purchase shares in Facebook, whom at the time was not looking for outside capital. The investor wasn’t looking for any additional voting rights or preferences that typically come with preferred shares, they just wanted a stake in the company. Therefore, we proposed this structure of a tender offer because it felt like a win-win: the investor could buy common stock directly from Facebook employees while Facebook could reward its employees with partial liquidity without diluting the value of their shares. The transaction was a huge success and soon companies started reaching out and we started doing a lot more of them.
Q: Why have private company tender offers become so popular? What are the benefits?
Tender offers allow a company to relieve some of the pressure for liquidity from its shareholders. This has become more important now as more companies choose to stay private longer and many are delaying their IPO timeline. Shareholders know that they have an opportunity to sell without having to wait for an exit event, which can also help reduce unauthorized secondary trading.
At the same time, tender offers have become a powerful talent acquisition and retention tool. Private companies are competing for talent with public companies that have highly liquid stock. Tender offers allow them to reward their employees with liquidity for their hard-earned equity in more regular intervals.
Another reason a private company might conduct a tender offer is to bring on additional investors or raise capital without having to dilute their existing stock or issue new preferred shares. This can be really beneficial, for example, to a later stage company looking to bring on strategic investors leading up to an IPO. Or if a company is conducting a primary fundraise, it can use the excess capital to conduct a follow-on tender offer and bring in additional investors.
Q: How have the actual programs changed?
The number of companies doing tender offers has definitely increased over the last few years. It’s no longer just mid-stage, Series C, D or E funded companies; smaller companies are also running them.
The size of the transactions also varies a lot more now. We’re no longer just seeing huge programs; companies are conducting smaller programs, some as frequently as once a year.
I think what has really changed is that tender offers have become more normalized. We’ve represented both buyers and companies; when I first started doing tender offers, no one really knew how they worked, and companies weren’t that comfortable conducting them. Not to mention the whole process was very manual. We were physically mailing documents to shareholders and waiting for them to mail them back before the expiration period. That process alone was really time-consuming and expensive.
Now the process is much more efficient. When we’re representing the company, we know what to expect and can help them think through how the program will work, what the rules and restrictions should be, as well as the long-term implications. And you have online platforms like Shareworks that make everything really easy, but still secure. Our team works directly with Shareworks to make sure the platform has the right documents and disclosures and is configured to the company’s parameters. We can test the platform for any issues beforehand and ensure that, from a seller’s perspective, the terms of the offer and transaction process are easy to understand (if they ultimately choose to participate).
Q: What are some of factors you tell your clients to consider before conducting a tender offer?
Information disclosure is an important issue to think through. You want to make sure your shareholders have the right tools to decide whether this is the right time to sell their shares. Similarly, you need to make sure buyers and sellers are on an equal playing field when it comes to having the necessary information and disclosures about the company. And, of course, companies have to be comfortable putting all of that information out there.
It’s also really important to think through the goals of the tender offer right at the beginning. Whether it’s providing liquidity to employees or cleaning up the cap table, understanding the goals of the tender offer is important for determining the rules of program (i.e. who is eligible to sell, how much they can sell, what happens if the offer is oversubscribed.) Thinking through those goals early and clearly communicating them to participants can help save a lot of time down the road.
Tax implications are also a really important factor to think through; not only how sellers will be taxed if they choose to exercise and/or sell their options but also the tax implications for the company. There isn’t a one-size-fits-all and how option exercises or sales will be taxed can depend on a variety of factors. That’s why it’s really important to bring your accounting firm, auditors and legal counsel together so that everyone is on the same page about the tax treatment of the tender offer. It’s a big process that usually takes more time and effort than people anticipate.
Q: Do you have any predictions for how the tender offer space will evolve?
I think tender offers are going to continue to grow, both in terms of the number of companies conducting them and the number of programs happening every year. This trend of primary fundraises coupled with a follow-on tender offer, in particular, is becoming increasingly common among private companies.
A lot of this has to do with the growing interest on the buyside. Not only are more buyers getting into the tender offer space but we’re also seeing, in certain cases, larger consortiums of investors involved in these transactions. This can raise some interesting questions about the buyer’s role in the tender offer and what decision-making rights or preferences each individual buyer should have. For example, we’re seeing scenarios where buyers may ask the company to convert their common stock into preferred immediately following the tender offer, if they feel discount between common and preferred stock is too narrow. It’s an interesting twist and something for companies to consider, especially as more buyers start to get involved in tender offers.