Tender Offers at Startups: What They Are and How They Work

Tender offers have become more common in recent years as private companies stay private longer. For startup employees and early investors, a tender offer can be one of the few opportunities to turn paper equity into real cash prior to an IPO or M&A. But what is a tender offer, exactly? And how does it work?

What is a Tender Offer?

A tender offer is a company-approved event that allows employees and early shareholders to sell some of their equity to outside investors. These typically happen in private companies and provide a way to get liquidity before an IPO or acquisition.

They are usually initiated by the company or major investors and are often tied to a new funding round. In many cases, the company sets specific terms such as:

• Elgibility: The company announces that certain shareholders, often current or former employees, can sell a portion of their vested shares.
• Volume: The company will often limit the amount of shares that can be sold (ie each shareholder can only sell 10-20% of their shares). Sometimes they set a certain total amount that can be sold and split it up proportionally based on who is participating. In some cases, you can sell completely out of your position.
• Pricing: The offer usually comes with a set purchase price (often based on the most recent 409A valuation or latest funding round)
• Timing: The company will set a deadline for participation in the tender, usually a few weeks.

Tender offers are not open-ended. They typically last a few weeks and may not come around again for years. Participation is entirely optional.

Why Do Companies Offer Tender Offers?

Tender offers can serve several purposes:

• Reward long-time employees with partial liquidity
• Clean up the cap table by buying out small or inactive shareholders
• Provide liquidity to early investors
• Allow new or existing investors to increase their ownership in an oversubscribed round

How Do Tender Offers Work?

Once a tender offer is announced, the company will notify eligible shareholders of the terms. You may be able to:

• Sell vested but unexercised options (by doing a cashless or same-day sale)
• Sell already exercised common stock

Employees often have 2–4 weeks to decide whether to participate. If you choose to sell, you’ll typically sign paperwork, complete a stock transfer, and receive your funds shortly after the offer closes.

Are Tender Offers a Good Deal?

That depends on your financial goals, the offer terms, and your belief in the company’s future. Some tender offers may seem low compared to the company’s internal valuation or your expectations for an IPO. Others may represent a unique opportunity to de-risk and get some liquidity after years of illiquid equity.

Things to consider:

• The offer price is often lower than preferred stock or expected IPO price
• You may owe taxes if you haven’t exercised your options yet
• You’re giving up future upside in exchange for cash now

Should You Sell in a Tender Offer?

That depends. Some employees sell to de-risk or pay off expenses. Others choose to hold their shares and go long. Things to consider:

• How much are you allowed to sell? (Often 10–30% of vested equity)
• Do you believe the company has more upside?
• What are the tax implications? (Are you triggering income or capital gains?)
• Do you need liquidity now?

Selling in a tender offer lets you access cash today and diversify—but you’ll give up future upside and may face an immediate tax hit. Many employees split the difference: sell some, hold the rest.

At ESO Fund, we help employees who don’t sell in a tender offer and want to afford exercising their options instead. (No obligation—just FYI.)

Tender Offer vs. IPO vs. Secondary Sale

Tender offers are often the first liquidity event startup employees see, and they typically come in conjunction with a fresh round of funding.

Bottom Line

Tender offers can be a welcome opportunity for startup employees to get liquidity before a major exit. They’re not without tradeoffs—but if you’ve been granted equity and your company offers one, it’s worth understanding your options. Whether you sell, hold, or explore exercising instead, make sure your decision aligns with your goals and risk tolerance.

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