What is a tender offer? A guide for private companies

Key Takeaways:

• A private-company tender offer gives eligible shareholders a limited opportunity to sell shares before an IPO or acquisition.

• The company defines who can participate, how many shares may be sold, and how oversubscription will be handled.

• The offer price may reflect recent funding rounds, company performance, share class, and investor demand; it may differ from the company’s 409A valuation.

• Tendering shares does not guarantee that every share submitted will be purchased, especially when the offer is subject to proration.

• Tax treatment depends on how the shares were acquired, who purchases them, and how long the shareholder held them.

What is a tender offer?

A tender offer is a formal proposal to purchase shares from eligible shareholders at a stated price during a defined period. Public-company offers are often priced above the quoted market price, while private-company prices are negotiated using factors such as financing history, share-class rights, company performance, and investor demand.

Private-company and public-company tender offer differences

A private-company tender offer is a controlled secondary transaction. A public-company tender offer may support an acquisition, a change in control, or an issuer repurchase.

Tender offers are one form of liquidity event, but they do not require the company to list its shares or sell the entire business.

How do tender offers work for a private company?

In a private company, a tender offer is a company-controlled liquidity event that lets employees, founders, and early investors sell vested shares or exercised options on uniform terms without waiting for an IPO or acquisition. 

• Announcement: The process begins when the bidder or offeror publicly announces its intention to make a tender offer. This announcement signals to the market the intention to acquire a significant stake in the target company.

• Offer terms: Once the intention is announced, the bidder communicates the offer's detailed terms to the target company's shareholders. These terms include the offer price, the number of shares sought, and the offer timeframe.

• Regulatory filings: To comply with legal requirements, the offeror makes the necessary filings with regulatory bodies. These filings provide transparency and protect the interests of the target company's shareholders.

• Shareholder response: After receiving the offer terms, the target company's shareholders must decide. They must decide whether to accept or reject the offer based on the terms and their own interests. This decision is often influenced by factors such as the offer price, the perceived future value of the shares, and the offer's strategic implications.

• Completion: If enough shares are tendered in response to the offer, the transaction is completed. The offeror acquires the shares and pays the agreed-upon price to the shareholders who accept the offer.

What are the types of private-company tender offers?

The most useful classification is based on who purchases the shares and where the purchase money goes.

1. Share buyback (issuer tender offer)

The company uses its own cash reserves to purchase shares directly from eligible employees, founders, or early investors. The repurchased shares are either retired or moved into the company treasury, which decreases total outstanding shares, prevents dilution, and concentrates ownership among the remaining stakeholders without involving outside parties.

2. Third-party tender offer

An approved external investor (such as a new or existing venture capital firm) provides the capital to buy shares directly from existing holders. Cash moves straight from the buyer to the selling participants, meaning the transaction does not touch the company’s balance sheet, total outstanding shares remain unchanged, and equity ownership simply transfers to the new investor.

3. Hostile takeover (public market tender offer)

An acquiring entity bypasses the target company’s board of directors and management, who oppose the acquisition, by making a direct, public offer to shareholders to buy their voting stock at a premium, aiming to accumulate enough shares to gain majority control of the company. 

Why do companies run tender offers?

For private companies, tender offers are a practical way to turn illiquid equity into real value on the company's own terms. The most common reasons include:

• Employee liquidity: Let long-tenured employees sell a portion of vested shares without waiting for an exit.

• Rewarding early shareholders: Give founders and early investors a way to realize partial value.

• Retention and talent attraction: A visible path to liquidity makes equity offers more compelling.

• Reducing IPO pressure: Ease the demand for an early exit by providing interim liquidity.

• Investor-led secondary transactions: Let new or existing investors buy shares from stakeholders.

• Cap table management: Consolidate or clean up ownership through a controlled process.

In the public markets, the purpose usually shifts toward acquisition and consolidation, where a buyer uses a tender offer to build a controlling stake. That's a different goal from the liquidity-driven offers most private companies run.

How is a private-company tender offer price determined? Check this section

Private-company shares have no continuously quoted public price. The tender price is therefore a negotiated transaction term, not an automatically observable market value.

• The price paid in a recent financing round.

• The rights attached to the share class being purchased.

• The company’s financial performance and outlook.

• Investor demand and the proposed transaction size.

• Restrictions on transfer and the limited market for the shares.

• Recent arm’s-length secondary transactions, if comparable information exists.

Who can participate in a tender offer?

Eligibility in a private company usually extends to current employees, former employees, early investors, and founders. But being a shareholder doesn't automatically qualify you. Companies set the rules.

Common eligibility criteria include:‍

1. Vested ownership or exercised shares: Unvested equity typically doesn't count. Options usually need to be exercised into actual shares.‍

2. Tenure or employee status: Some offers limit participation to employees past a certain service milestone, or exclude certain leaver categories.

3. Share class or grant type: Common stock, preferred, RSUs, and exercised options may be treated differently.

4. Participation caps: Limits on how much any individual can sell.

5. Required documentation: Election forms and acknowledgments completed before the deadline.

How to prepare your company for a tender offer?

Here is a step-by-step guide to help prepare your company to navigate the tender offer process effectively:

• Conduct due diligence: Research the target company, including its financial health, market position, and potential risks. Due diligence is an important step that helps you gather key details about potential suppliers or vendors. This helps you make smart choices and reduce risks in the buying process.

• Engage advisors: Navigating the complexities of a tender offer can be challenging. Therefore, it’s advisable to engage financial and legal advisors. These experts can offer actionable insights and guidance across different stages of the process. This helps you understand the legal framework of tender offers, evaluate the fairness of the offer, and ensure compliance with regulatory requirements.

• Prepare documentation: This includes preparing the terms of the offer, regulatory filings, and any other documents required for the tender offer. The documentation should be clear, concise, and in compliance with all relevant laws and regulations.

• Develop a communication plan: The communication plan should clearly state what details to share, when to share them, who should receive them, and how to share them. A strong communication plan helps ensure your company’s communication goals are met and that everything you send aligns with your main communication strategy.

• Secure financing: Before initiating a tender offer, ensure the necessary funds are available to complete the transaction. This involves assessing whether your company has sufficient cash on hand or whether other liability-management alternatives are available.

• Anticipate challenges: Identifying potential obstacles and planning strategies to address them is a crucial part of the preparation process. This could involve anticipating defensive measures from the target company, understanding the tax implications, and preparing for potential legal or regulatory hurdles.

How are private-company tender offers taxed?

When shareholders sell shares to an outside investor, they pay capital gains tax on the difference between the sale price and their tax basis. The applicable treatment depends on how long they held the shares.

If the company repurchases its own shares, the proceeds may be taxed as capital gains or as a dividend, depending on the shareholder’s ownership before and after the transaction.

Employees may also owe ordinary income tax if they exercise stock options as part of the tender offer. The final treatment depends on the award type, holding period, and transaction structure, so participants should consult a qualified tax adviser.

Conclusion

A tender offer gives shareholders a defined opportunity to convert private shares into cash. If you decline, you retain your shares and any future upside, along with the risks and limited liquidity of private-company ownership.

A future tender offer, IPO, or acquisition is never guaranteed. Even if another opportunity arises, its price, eligibility rules, participation limits, and timing may differ. Evaluate the current offer on its own terms, considering the after-tax proceeds, your financial needs, concentration risk, and confidence in the company’s prospects.

The right decision balances the value of cash available today against the uncertainty and potential value of the shares you continue to hold.

How Qapita supports tender offers?

Qapita’s tender-offer solution connects cap table data with workflows and expert support for offer structuring, eligibility, approvals, documentation, participant communications, elections, settlement, and post-transaction reconciliation.

Considering a liquidity program for employees, founders, or early investors? Book a demo to see how Qapita can support your next tender offer.

FAQs

What does “tender shares” mean, and what does it mean to tender shares?

To tender shares means to offer them for sale under the terms of a formal tender offer. The shareholder submits an election stating how many eligible shares they want to sell. The buyer may accept all, some, or none of those shares depending on the offer conditions and any proration rules.

What is tender business?

“Tender business” usually refers to a procurement process in which companies submit competitive bids to supply goods or services. It is different from a stock tender offer, which involves an offer to purchase securities from shareholders.

What is a stock tender offer?

A stock tender offer is a formal proposal by a company or third-party buyer to purchase shares from eligible shareholders at a stated price during a defined period. Shareholders decide whether to participate, subject to the offer’s eligibility requirements, purchase limits, and other conditions.

Why would a company make a tender offer?

A private company may conduct a tender offer to create liquidity for employees, founders, or early investors, manage its ownership structure, or meet investor demand for shares. A public company may use one to repurchase its own stock, while an outside bidder may use a tender offer to acquire a significant stake or pursue control of the target company.