Tender Offers, Explained: How to Sell Startup Stock Before IPO Day

You’ve got equity in a high-growth startup. Paper millions, right? But until there’s an IPO or acquisition, that wealth isn’t exactly useful for buying groceries—or, say, a house.

Enter the tender offer. It’s not a silver bullet. But it is one of the few structured ways private company employees and investors can turn startup shares into actual cash. Here’s how it works, when it happens, and what you should think about before you opt in (or out).

What is a tender offer?

A tender offer is when someone, usually your company or a group of outside investors, offers to buy back existing shares at a set price.

In public markets, it’s often used as a takeover strategy, with the buyer offering above-market prices to grab a controlling stake. In the private startup world, it’s a way to give early employees and investors a chance to sell shares before a major liquidity event.

The basic idea: someone offers to purchase a set number of shares at a specific price. You can accept or decline. If you do tender your shares, you’ll get paid once the transaction closes.

Why startups use tender offers

Private companies are staying private longer. Which means employees and early investors can end up holding equity for a decade or more with no exit.

A tender offer gives people a way to sell shares while the company is still private. It’s not just about rewarding early believers; it’s also about controlling dilution, clearing cap table clutter, and appeasing impatient shareholders.

Here’s who wins:

• Employees and founders get liquidity
• Investors get access to shares they wouldn’t normally be able to buy
• The company reduces dilution if it buys the shares back itself

Two flavors of tender offers

Most private company tender offers fall into one of two categories:

1. Share buyback

The company itself uses cash (either from the balance sheet or a recent fundraise) to repurchase shares. This is usually simpler to execute.

2. Third-party tender

Outside investors buy existing shares from employees or early stakeholders. This often happens alongside or just after a new primary round.

Each has tradeoffs for the company, but are largely the same thing for the employee. Share buybacks keep more control in-house. Third-party tenders can help meet excess investor demand and may come with a bit more complexity.

How a tender offer works

The process can take a few months from planning to close. Here’s what usually happens:

1. The buyer (company or investors) proposes a price and quantity.
2. The board of directors approves the offer terms.
3. Legal, finance, and external counsel prep the documents.
4. A formal offer window (usually 20 business days) opens for eligible shareholders to decide whether to sell.
5. Once the window closes, allocations are finalized and payments go out.

Participants typically receive documents like:

• An offer to purchase
• A letter of transmittal
• Recent financials and risk disclosures

What a Tender Offer Looks Like in Practice

Let’s say you’re a designer at a high-growth defense-tech startup. You’ve been granted 20,000 ISOs over the years, and you’ve exercised most of them already.

Now the company is offering a third-party tender. A lead investor from the latest round wants to buy up to 2 million common shares at $30 each. Your cost basis is just $1.

You decide to sell 5,000 shares. Here’s what happens:

• You submit your intent during the 20-business-day window.
• You get approved, the deal closes, and you receive $150,000 in gross proceeds.
• Because you satisfied the ISO holding periods, the entire gain is taxed at long-term capital-gains rates.
• Still, you’ve turned illiquid equity into actual cash and derisked your exposure in a company that may not exit for several more years.

That’s the essence of a tender offer: real liquidity, real tradeoffs.

Who gets to sell, and how much

Not everyone can participate. The company sets eligibility rules based on things like:

• Equity type (options & common shares vs. double-trigger RSUs)
• Employment status (current vs. former)
• Share class (common vs. preferred)
• Vesting status (you may need to have exercised options)
• Relationship to the company (founder, investor, etc.)

Companies may also cap how many shares each participant can sell, especially for large holders) to ensure the buyer pool can accommodate multiple sellers.

How the price gets set

In a buyback, the company usually sets a fixed price, often based on the most recent preferred round.

In a third-party offer, the price is negotiated with investors. It’s often lower than the preferred share price, since common shares come with fewer protections. But not always.

Either way, the offer price is fixed before the window opens. It’s up to you whether it’s worth it.

Should you tender your shares?

This is the part where we say: it depends. A tender offer can be a great opportunity to diversify, de-risk, or just get some cash in the bank. But it’s not a no-brainer.

Ask yourself:

• Do I need the liquidity right now?
• Do I think the company’s value will keep rising?
• How close is the next exit event?
• Will I regret selling if the stock 10Xs in 3 years?
• Will selling now help me cover the tax bill on my other options?

Also worth noting: Tendering shares can affect the tax treatment of your stock. For example, if you sell ISOs before hitting the holding period, they get taxed as ordinary income instead of capital gains.

Prospect can work with you to model all of these scenarios and let you make the smartest moves and handle any tender offer like a pro.

What if you don’t participate?

Nothing happens. You keep your shares. You’re not forced to sell—and you won’t lose your equity just because you sat this one out.

That said, if it’s a one-time liquidity event, it might be a while before you get another shot.

Tax implications of a stock tender offer

How your sale gets taxed depends on a few things:

• The type of equity you’re selling (ISOs, NSOs, RSUs, common)
• Whether you’ve held it long enough to qualify for long-term capital gains
• Whether you’re exercising and selling in one transaction

In general, you may owe:

• Ordinary income tax (on ISO spread if you don't meet the holding period and NSOs if you do cashless)
• Capital gains tax (if shares are held long enough)

Bonus tip: maxing out your 401(k), donating appreciated shares, or lowering your Adjusted Gross Income (AGI) in other ways could help reduce your tax bill.

Plan for this early

Tender offers are one of the few chances startup employees get to actually realize value from their equity pre-IPO.

If your company announces one, don’t wait until the last day of the offer window to start thinking. Go to the info sessions. Read the docs. Run your numbers. Ask your tax advisor. Ask your friends.

Prospect can help you every step of the way, from modeling your expected proceeds, calculating a future equity upside, or if you should even tender at all. So you can make the smartest call for your future self.

‍

Frequently Asked Questions