How a Tender Offer Works

Core Definition

A tender offer is a type of secondary market transaction where shareholders are given the opportunity to sell a specific portion of their company shares at a fixed price per share. This offer might come from various buyers, including individual or institutional investors. It could also come from the company itself, in a share buyback.

For private company stock, the offer price is typically determined by the company and any investors participating in the transaction, and is often based on the company’s most recent financing round.

Why Tender Offers Matter for Private Companies

Because shares in private companies aren’t publicly traded, founders, early employees, and investors typically have few chances to sell their holdings. Tender offers have emerged as a popular method to address this by providing a structured liquidity event, allowing these shareholders and longtime staff to cash out some of their shares.

At base, tender offers address the growing gap between when employees receive equity compensation and when they can realize value from it. As companies stay private longer — currently an average of more than 12 years — the traditional path to liquidity through IPO or acquisition becomes increasingly distant. This creates retention challenges as employees watch their equity remain theoretically valuable, but practically inaccessible.

Value Creation for Each Participant

Tender offers allow early employees to realize gains from their equity. This is particularly valuable for those who have been with the company for multiple years and may have significant portions of their net worth tied up in company stock. The ability to monetize even a small amount of their holdings may provide financial flexibility for major life decisions like home purchases, education expenses, or starting families. Founders who hold common shares may also be included in this group.

Initial investors may benefit from the ability to return capital to LPs while maintaining positions in promising companies. This is especially important for venture capital firms that need to demonstrate returns to their limited partners on specific timelines.

For companies themselves, tender offers help to proactively meet shareholder liquidity demands, reorganize cap table structure and governance, help boost employee retention and satisfaction, and indicate a high level of company maturity. When executed strategically, tender offers aren’t just reactive solutions to the problem of low liquidity, but a tool that offers a competitive advantage.