A Guide to Private Company Tender Offers and Their Tax Implications

An Unexpected Email: Your Paper Wealth Is Now Real

The email arrives on a Tuesday morning. The subject line reads, "Invitation to Participate in Voluntary Tender Offer." For the last five years, your company stock options felt like monopoly money. A distant promise. Suddenly, that promise is very real. You have the chance to sell a portion of your shares for real, spendable cash.

The initial rush of excitement is quickly followed by a wave of questions. The relief of liquidity battles with the fear of making a huge mistake. Should you sell? How much? Which shares are the best to sell? And the biggest question of all, what will the tax bill look like? This moment of opportunity is also a moment of intense pressure, where the right choices can accelerate your financial goals and the wrong ones can lead to regret and a surprisingly large check to the IRS.

Should You Sell Your Shares in a Tender Offer?

Participating in a tender offer is often a smart move to turn illiquid paper wealth into real cash, reduce your concentration risk, and fund your financial goals. But the decision is not just about selling. It’s about selling the right shares in the right way. Most employees with unexercised stock options do not optimize their participation and end up paying much higher taxes than necessary.

The key is to approach a tender offer, not as a lottery ticket, but as a strategic financial planning event. A sound decision-making process involves three key stages.

First, you must define your liquidity needs. How much cash do you actually need for a down payment, to pay off debt, or to diversify your investments. Second, you have to decide which shares to sell. Not all shares are created equal from a tax perspective. Incentive Stock Options have different rules than Non-Qualified Stock Options or Restricted Stock Units. Finally, should you consider recycling the proceeds? A savvy move is to use the cash from the tender offer to exercise and hold other vested options, particularly ISOs. This starts the one-year holding period clock, positioning those shares for more favorable tax treatment in a future sale.

How Will the IRS Tax Your Tender Offer Proceeds?

The biggest pitfall in any tender offer is the tax surprise. How your proceeds are taxed depends entirely on the type of equity you sell and how long you have held it. Selling common stock you have owned for over a year is straightforward and results in long-term capital gains. But selling shares from recently exercised options or RSUs creates very different tax bills.

The most common mistake involves Incentive Stock Options (ISOs). If you exercise your ISOs and sell the shares in less than one year, the sale is a "disqualifying disposition." This means the entire gain, the spread between the sale price and your exercise price, is taxed as ordinary income (a much higher rate than capital gains). For Non-Qualified Stock Options (NSOs), the spread at exercise is always taxed as ordinary income and is also subject to payroll taxes.

Here is where it gets tricky. The IRS might classify a tender offer as "compensatory" which can turn a portion of your expected long-term capital gains into ordinary W-2 income. The IRS looks at several factors, but the simple rule is that if an offer has a significant price premium over the current 409A valuation and is available only to current employees, the IRS has a strong case to call part of your gain compensation. Imagine you exercised ISOs 18 months ago at one dollar per share. The current company valuation is eight dollars, but the tender offer is for ten dollars. That two-dollar premium could be reclassified as W-2 income, hitting you with an unexpected tax liability.

FAQ

What are the different types of tender offers?

There are two main types. A Structured Liquidity Tender Offer is a company organized sale to outside investors. A Controlled Liquidity Tender Offer typically happens alongside a new funding round where the company controls who buys and sells shares.

Do I have to participate in the tender offer?

No, participation is completely optional. If you choose not to sell, you simply keep your shares. There is no penalty for not participating.

How much of my stock can I sell in a tender offer?

The company usually limits the amount of shares you can sell, often as a percentage of your vested holdings, like 20 percent. This is to ensure that employees' incentives remain aligned with the company’s long term goals.

Your Next Steps

1. Run a gut check analysis. Before you build complex spreadsheets, answer some basic yes or no questions. Do you need cash in the next 12 to 18 months? Are you overexposed to your company's stock? How far are you from qualifying for other tax benefits like QSBS? This initial assessment provides a clear starting point.

2. Define your why. Get specific about your liquidity goals. Do not just sell for the sake of selling. Is this money for a home down payment? Is it to pay off high interest debt? Write down the exact dollar amount you need and what it is for. This clarity prevents you from selling too much or too little.

3. Map your equity and model the tax. Create a simple spreadsheet listing all your equity grants. For each, note the grant date, exercise price, and number of shares. Model the tax impact of selling shares from each grant to identify which are the most and least tax efficient to sell. This helps you avoid the common mistake of triggering high ordinary income tax rates.

4. Plan for the proceeds. Selling is only half the battle. Earmark some of the cash for your estimated tax payments. Then, consider using a portion of the remainder to exercise and hold other vested options. This starts the one year clock for long term capital gains treatment on those shares, setting you up for a more tax efficient future.

Meme of the Week

Don't Just Sell, Strategize

A tender offer is a powerful tool, but it is not just a cash-out opportunity. It is a critical financial planning event. Moving with a clear strategy can save you a significant amount in taxes and bring you closer to your long term goals. The difference between a reactive choice and a proactive plan is often six figures.

If your company just announced a tender offer and you are not sure what to do, schedule a call. We’ll build a data driven plan to help you make the most of it.

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Marcel Miu, CFA and CFP is the Founder and Lead Wealth Planner at Simplify Wealth Planning. Simplify Wealth Planning is dedicated to helping tech professionals master their money and achieve their financial goals.

Disclosures
Simplify Wealth Planning, LLC (“SWP”) is a registered investment adviser in Texas and in other jurisdictions where exempt; registration does not imply a certain level of skill or training.

If this e-mail refers to any client scenario, case study, projection or other illustrative figure: such examples are hypothetical and based on composite client situations. Results are for informational purposes only, are not guarantees of future outcomes, and rely on assumptions specific to the scenario (e.g., age, time horizon, tax rate, portfolio allocation). Full methodology, risks and limitations are available upon request.

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