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Welcome to the 51st edition of the Tech Financial Planning (TFP) newsletter.
When you work at a private company, the big dream for most is that your company goes IPO one day.
And while IPOs often grab headlines, it’s not the only way that you can turn your private company stock into cash.
The past few months we’ve helped several clients at two different private companies evaluate tender offers.
Tender offers are “a structured liquidity event that typically allows multiple sellers (including employees and early investors) to sell their shares either to another investor, a group of investors, or back to the company at a predetermined price.
In other words, it’s a potential way for employees to sell their shares for cash while the company is still private” (emphasis added…Carta’s FAQ on tender offers is great).
If you are going through a tender offer, this is great news!
A problem for many high flying private tech companies is that you can look really rich on paper (and to the IRS, if you exercised a lot of stock options), but a lot of the time, there’s no way for you to actually realize any of that money.
This is a chance for you to turn all that paper money into actual cash.
A couple notes on tender offers.
You typically Can only sell a certain number of shares
Your company will let you know how many this is, whether it’s a percentage (ie 20% of your shares) or date based (all shares owned before X date), or in one tender offer’s case, a complicated formula that was way more complicated than it needed to be.
The tender offer can be “oversubscribed”
While you may be allowed to sell a certain number of shares, if too many people participate, there may be more shares being sold than investors want to buy.
If this is the case, your portion may be reduced (so will everyone else's, proportionately).
Your company will let you know how much you will get per share
This is pretty straightforward for the most part, but with one recent tender offer, we saw two different amounts: a higher amount for current employees and a lower amount for former employees.
How to approach the tender offer
Should you participate, and if so, how much?
The question you might be asking yourself is do I take the guaranteed money today, or take a chance that it goes up even more in the future?
There is no right answer here.
If you sell everything you can and the company turns into the next Apple or Amazon, you might be upset that you sold any.
But while it may be tempting to hold everything, there’s no guarantee that it will go up.
While you can make guesses about what your company will or won’t do in the future, the only thing you can know for sure is this liquidity event today.
For several of my clients recently, they decided to sell as much as they could in the tender offer:
If the stock continues to go up, they still have a lot and will participate in the upside
They will continue to earn more company stock
There are things they want to do with the money today (house, travel, etc)
It can be hard to look at this objectively, because if your company is in this position, there’s a good chance it’s taken off the past few years and seemingly will continue to do so.
But let me remind you, that’s not a guarantee.
Just look at 2022 and 2023 and companies that had fundraising rounds that were below previous high valuations - for example, Stripe, Tonal, and Klarna, among many others
If you want to hold, a question you might ask yourself is: if this stock never turned into anything, would you be ok?
If the answer is yes, then you might be ok holding.
What shares to sell?
You might have several types of company stock - likely RSUs (either single or double trigger) or stock options (NQSOs or ISOs), but possibly Restricted Stock Awards.
Depending on what types of stock you have, and whether you’ve exercised your options or not, you want to look at what shares you would sell in a tender offer.
This could be a post on its own, but you want to think through which shares you want to sell, if you need to exercise options and what that does for cash flow and taxes, how long you’ve held shares (long term versus short term gains)
What about taxes?
Taxes will be a big part of any tender offer, and this too could be a post of its own.
But if you are participating in a tender offer, and particularly if you are selling a lot of stock, then taxes will play a big part.
If you are selling previously held shares, you need to look at capital gains taxes
If you are exercising and selling options, you need to look at withholdings and ordinary income taxes
If you aren’t prepared, you could get hit with a massive tax surprise next tax season.
One opportunity to consider: if you are selling a lot of stock and you have unexercised incentive stock options (ISOs), there could be an opportunity to exercise more ISOs without triggering the alternative minimum tax.
Putting It All Together
If you’re reading this and about to go through a tender offer - congrats!
I hope this post gives you some idea of what to think about as your approach to participating in it or not.
Big decisions like these can be paralyzing as you think through 1000 possible scenarios and what you should or shouldn’t do.
I’ve found that it can really help to talk through the decision making with someone, but I’d be careful about taking advice from slack or the water cooler.
Company stock is where you can make big money and big mistakes.
I hope that it’s the former for you!
If you have a lot of stock in a private company and want help thinking through your options (pun somewhat intended), reach out to met a joe.marshall@coastalcapitaladvisors.com or schedule an intro meeting.