Tender Offers in Private Markets: How Companies Give Early Employees Partial Liquidity

As private companies stay private longer, a practical problem has emerged that has nothing to do with investors and everything to do with employees. A software engineer who joined a venture-backed startup in 2014 and helped build it into a multi-billion dollar business by 2024 may have spent a decade watching their equity appreciate on paper while being unable to sell a single share.

Tender offers have become an important mechanism for solving this problem. They allow companies to facilitate the sale of private shares to new investors while retaining significant control over who buys, at what price, and how much liquidity each seller receives. Understanding how they work is relevant both for employees holding private equity and for investors seeking to buy private shares from motivated sellers.

A private company tender offer is an organized process in which the company, or a third party acting with the company’s cooperation, invites existing shareholders to sell some or all of their shares at a predetermined price. Unlike an IPO, there is no public market; the buyer is typically a small group of institutional investors who have been selected and approved by the company.

The company typically has significant control over the process: it sets the price, determines which shareholders can participate, caps the total amount that can be sold, and approves the buyers. This is fundamentally different from a secondary market transaction between two private parties, where the company may or may not have been consulted.

Control over the shareholder registry is one of the important considerations for a private company. A secondary sale between two private parties, even if legally permitted, can result in shareholders the company has never vetted and does not want. The company also may lose the ability to manage the implied valuation signal that comes with any share transaction.

A tender offer solves both problems. The company approves the buyers, sets the price to reflect the valuation it wants the market to observe, and limits the total liquidity available to prevent a disruptive amount of insider selling in a single event.

The tender price is sometimes informed by a board-approved 409A valuation, which is an independent appraisal of the company’s common share fair market value required under US tax law. For later-stage companies, the tender price may instead reference the most recent preferred round price or a separate valuation conducted specifically for the transaction.

In practice, the tender price is often below where institutional investors would value the preferred shares in a primary round, reflecting both the illiquidity premium demanded by the seller and the fact that common shares typically carry less economic preference than the preferred shares held by institutional investors.

Early employees and founders who have been with the company long enough to hold vested equity and who may seek some liquidity ahead of an uncertain IPO timeline. Early-stage seed investors or angel investors who participated before the company became well known and who want to realize some return without waiting for a full exit.

The company usually imposes caps on how much any single seller can tender, both to preserve incentive alignment and to limit the total float of shares changing hands in any one transaction.

Typically institutional investors, including late-stage venture funds, growth equity firms, and increasingly specialized secondary market buyers, who want exposure to the company ahead of a potential IPO or other liquidity event. The company screens and approves these buyers in advance to ensure they align with its shareholder base objectives and will not create governance complications.

In the US, gains from the sale of private shares in a tender offer are generally taxed as capital gains, with the holding period determining whether they are classified as short-term or long-term. For ISO holders, the tax treatment can be more complex, potentially triggering alternative minimum tax in certain scenarios. Professional tax advice is essential before any employee decides to participate in a tender offer.

• Private company tender offers allow employees and early investors to sell shares before an IPO through a company-controlled, company-approved process
• The company may set the price, approve buyers, and limit the total amount that can be sold, maintaining control over valuation signaling and shareholder composition
• Tender prices are typically set at or below the most recent preferred round price, reflecting the illiquidity of common shares and the cost of accessing liquidity outside a full exit
• Buyers are usually institutional investors seeking pre-IPO exposure to a company before it enters the public market
• Tax treatment for sellers depends on share type, holding period, and jurisdiction, and professional advice is important before participating

Private company tender offers have become an important mechanism for managing the increasingly long gap between founding and exit in the venture-backed technology ecosystem. For employees, they offer partial liquidity without requiring a full company exit. For investors, they represent an organized channel for accessing pre-IPO companies at a stage where their shareholder agreements are already in place and the company has opted them in as a buyer. Understanding the mechanics, pricing dynamics, and limitations of tender offers is essential for both sides of the transaction.