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The 4 W's Of Liquidity Events: What, Who, When and Why

A liquidity event can mean a lot of different things to a private company. It may mean that your company is going through an IPO or direct public listing, or it could mean that you’re going through a secondary transaction like a tender offer or buyback.

When we talk about liquidity events at Shareworks, we are usually referring to the last example from above—a tender offer or buyback. This brings us to the first W.

What Is 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 only applies to a limited number of available shares.

Who Holds A Tender Offer?

Later-stage companies, usually those that have completed a series C funding round, are looking to complete a tender offer or company buyback. Those who participate are often employee shareholders, including executives.

Not sure if a tender offer is right for your company? Take a look at this article to answer that question.

When Do You Hold a Tender Offer?

When to run a tender offer can be subjective. It depends on your company’s goals and funding. Typically, somewhere around a Series C funding round companies find themselves with the money to do a tender offer, either from their balance sheet or with funds related to a new round of investment, and they have long-time shareholders with vested stock that are ready to receive some level of liquidity.

Figuring out when to run a tender offer also depends on how many times you’re planning to perform a buyback. Generally speaking, it’s most common to perform a tender offer annually; however, in some cases there may be tax incentives if you run multiple in a year, for example if a stock plan uses single trigger RSUs. And sometimes a tender offer is a one-time deal meant to reward employee shareholders.

Bottom line, a tender offer usually follows a new round of funding, which also means a tender offer and a 409A valuation are somewhat linked. Make sure to update your 409A valuation with every round and if you intend to have a buyback.

Why Do You Run A Tender Offer?

There are a few reasons why a company would choose to run a tender offer. We’ve broken them out below.

  • Tender offers create cultures of ownership and motivate employees

Granting equity-based compensation at the outset is often used to incentivize employees and align the quality of their work to the success of the company by tying a portion of their compensation package to the value of the company; thus, creating a culture of ownership.  

However, this plan only works for so long without a liquidity event. The key to creating a successful culture of ownership lies in expressing the value of that equity compensation. If your employee-based participants don’t feel that their equity has value, they won’t be as motivated as they could be. By offering liquidity to long-term shareholders, you reengage them, promote the value of their equity and help them turn what may appear as intangible value into something tangible.

In doing so, you help your employees feel appreciated and motivated to help the company reach its goals. This is particularly true when tender offers allocate only a portion of someone’s equity holdings as “for sale,” meaning that part of their equity is still attached to the company’s success.

  • Tender offers reward employees

Rewarding employees is essential to a happy culture and a thriving workforce. Running a company buyback allows you to turn an employee’s paper wealth into cash that they could use to buy a house, invest for retirement or literally cash-in on whatever their dreams are.

Rewarding employees is also a method for retention, so this fits in well with our next reason.

  • Tender offers encourage retention

Consider a scenario where you’re a private company with long-term employee shareholders that have a significant value of their compensation package tied up in equity-based compensation. At this point, that portion of their compensation is paper wealth. It’s untouchable until a liquidity event, like an IPO or company acquisition.

Enter the tender offer. Now, you can encourage long-term talent to stay with you rather than accept a job offer elsewhere for a compensation package with higher cash value. Running a tender offer encourages talent retention by giving employees a path to liquidity for their long-time shares. Since tender offers are only open to employee shareholders, there is an incentive to stay with that company and make the most value from their shares.

Couldn’t they just leave and still get their money? Not quite. Most company equity plans restrict individual trading on the secondary market, so employees with vested stock-based compensation would have to wait for a company-wide liquidity event to realize the cash value of their equity compensation.

Shareworks makes managing tender offers easy. In fact, our liquidity team has managed over $6 billion in tender offer transactions since the beginning of 2020.

Learn how we can help you run a better tender offer.

Shareworks by Morgan Stanley services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.