A Tender Offer Can Provide Early Investors with a Key Avenue to Liquidity

Private market investments are inherently illiquid, and early-employees and investors should be prepared to hold on to their investments to the point of failure or exit. However, there are some avenues that can provide liquidity to private market shareholders, like secondary sales or tender offers. In this blog, MicroVentures is sharing more about tender offers, what they mean for investors, and how they might be used.

What Is a Tender Offer?

A tender offer is a structured proposal to purchase a large number of securities from existing shareholders within a set timeframe. While commonly associated with public company acquisitions, the framework can also be applied to private companies.

The purchaser in a tender offer is most often:

• The Company Itself – also known as a share buyback, the company that originally issued the shares plans to repurchase its own securities from shareholders
• A Third Party – this can be an external investor or a group of investors

Regardless of purchaser, the company must first determine transaction size, shareholder eligibility, and how shares will be tendered if the offer is oversubscribed. The tender offer is then made to eligible shareholders, and each decides whether to tender (sell) their shares. The tender offer may also be contingent on the purchaser acquiring a minimum number of shares.

How are Tender Offers Used?

As startups are staying private longer, tender offers can provide liquidity to investors before an initial public offering (IPO) or acquisition occurs. Tender offers can provide a structured process for employees and investors to monetize their equity without requiring a full company exit.

The tender offer can provide unique benefits to each party:

• Selling Shareholders – Employees, early investors, and founders can potentially realize a return on investment without having to wait for an exit
• The Company – The company can boost employee morale, retain key talent, and reduce potential pressure for a premature sale or public offering by facilitating liquidity
• Purchasing Investors – New investors can acquire a position in a private company without having to wait for the company to issue new shares

Structuring a Tender Offer

The structure of a tender offer can look different depending on who is purchasing the shares and which shareholders are able to participate. Two common models include:

Third-Party Tender Offer

In this structure, external investors are providing the capital to purchase shares from existing shareholders, whether a company acquiring a stake or a syndicate of multiple investors. This approach can be driven by investor demand, where interested parties are looking to acquire equity beyond what the company has issued in a primary financing round. The company will still be significantly involved in a third-party tender offer.

Share Buyback

When the company itself is repurchasing its own shares from stockholders, the capital typically  comes from the company’s balance sheet or recently raised capital. The primary goal is usually to provide liquidity to employees and early investors directly, especially if exit plans for the company are not expected for a longer period of time. Buybacks can also be used to regain control, offset ownership dilution, or clean up a cap table.

Key Components

There are a few key components to examine when structuring a tender offer.

Transaction Price

Since the purchase price of shares is fixed in a tender offer, establishing this price is a central element to the transaction. This price can be negotiated between the company and the purchasing investors, or even determined by the company’s board. It may also be benchmarked against a company’s recent price per share or valuation.

Eligibility and Allocation

Many tender offers are not open to any and all shareholders uniformly. There may be eligibility criteria based on shareholder type (employees vs investors), vesting status, share class, or duration of share ownership. Setting individual sale limits can also prevent a single large seller from dominating the transaction, supporting a broader distribution of liquidity.

Regulatory and Procedural Compliance

Tender offers need to uphold specific SEC rules, for example, the offer must remain open for at least 20 business days. This provides sellers a mandated review period in which they can examine disclosure documents and seek professional advice.

To support compliance and prevent information disparities, companies prepare a comprehensive disclosure package, outlining the offer’s core terms, pricing strategy, participant eligibility, and associated risks. This formal process, sometimes aided by a hired agent, helps facilitate a transparent and regulated transaction for all parties.

Final Thoughts

Tender offers can provide liquidity to existing shareholders outside of an exit event . Allowing early employees and existing shareholders to sell their shares can help companies manage their stakeholder base strategically, boost employee morale, delay an acquisition or IPO, or allow new investors to access equity. While tender offers may not be right for every startup, it can be a powerful tool for aligning the interests of a company, employees, and investors.

Are you ready to invest in startups? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• Understanding Valuation Caps
• Calculating a Startup’s True Runway
• Subsequent Funding Rounds: Follow On Investments
• Understanding Pro Rata Rights

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.