?? Should I sell in a tender offer?

The year got off to a hot start with a handful of companies announcing tender offers in 2024. After a long hiatus, it appears that tender offers are officially back. For employees at a company offering a tender, this is a huge moment to potentially cash out your hard earned shares. For the rest of us, it’s also great news as it shows that the startup and tech markets may be improving.?

Our calendars have been filled the last couple of weeks speaking to a lot of you on how to navigate the tender. Those who started planning around their equity years ago are usually sitting in good situations and favorable tax positions, and the decision is a bit easier. For those that are taking action for the first time, the decision might be more difficult as you navigate the tradeoffs between tax consequences and liquidity. The good news is that whichever group you sit in, tenders are a net positive and can help put you in a great position going forward.?

Today we’re back with an off-cycle newsletter today to provide some help for those who are going through or will soon go through the decision. Let’s jump in.

Tender? No, not like chicken tenders.

For those who don’t know, a tender offer is a company sponsored event in which the company offers a way for employees to sell their options or shares back to the company or outside investors. Almost all tenders nowadays means that an outside investor or fund will be purchasing your common stock directly at a pre-negotiated price.

Naturally, the price is almost always the most talked about topic. Tender offers are usually offered at a discount to the last funding round and even may happen alongside a new funding round. VCs and other funds will often invest in the company and receive newly issued preferred stock in that Series A, B, C, etc. In a tender, the same or other investors will be buying the common stock directly from employees. Common stock is often offered at a discount to preferred stock because they don’t carry the same rights or preferences as preferred stock.?

As to how the price is determined - well that varies, but market conditions are often a big input. The market for VC backed startups wasn’t great the last couple of years so there were very few tender offers and ability for employees to obtain liquidity. We’re in a much different market right now than the 2020 and 2021 years, so valuations will generally be lower unfortunately. That’s just how the market is right now.?

Some might be disappointed in the prices offered, but it’s important to note that the option for liquidity is always good. Tenders, and the ability to sell in general, are rare with private stock and the fact that your company may be offering a tender is a positive. The next chance is never guaranteed. If you’re in a position to participate in a tender, you should be happy to have the opportunity. Afterall, most startup employees don’t get to a point where their shares can be sold.?

Okay, now that we established how a tender offer works, we’ll address the most common question we get.

?? Should I sell? That is the question.

It can be an excruciating decision to decide to part ways with your company’s stock. Afterall, you worked hard for years to get that stock and have seen your company grow since you joined. There’s definitely much more of an emotional attachment to your place of employment than just simply buying public market stock. I get it - I have stock in Secfi and if I get the chance to sell that one day, it’s going to be a bit of a rollercoaster of emotions. The decision to participate is largely a personal one as everyone has a different financial situation, risk tolerance, and goals.?

All that said, taking money off the table is often a wise decision. In fact in most circumstances, it’s likely the most sound financial decision. If you’ve worked at a startup that has grown significantly, the odds are that your personal balance is very heavily concentrated in your company’s stock. In many ways that means you’ve already won! You’re one of the small percentage of startup employees to make it to the point where you can get liquidity.

FOMO can be tough in these situations, but you don’t need to sell everything. You can still participate in the upside while lowering your risk. Hopefully your company will continue to grow, but so can other investments.?

Another good way to think about diversification is to take the total value of your stock and multiply it by the tender offer price. This represents the total cash value of your shares today if you were able to sell everything. Now ask yourself this… if you had that money in your bank account instead of the shares, would you take the entire amount and buy stock of your company at that price today??

Your answer to that question will again depend on your financial situation and risk tolerance so I can’t answer that question for you, but for the majority of folks, the answer is likely no. Now onto the next common question we get…

?????How much should I sell?

Most company tenders will set a limit to many shares you can sell depending on demand and restrictions which usually comes out to 20-30% of the total holdings so your upper bound and maximum is set. There is almost always a set dollar amount that investors are willing to put in so even if you ask for the maximum, you may be prorated down to a lower percentage once all is said and done.

This may be the hardest question to answer in a general way as everyone’s answer will be different based on your circumstance. I always tell people to start out with what they are using the money for. If it’s to buy a house or a downpayment, then you can work backwards from there to determine how much cash you need. If it’s to diversify your balance sheet, well then you need to look at your personal balance sheet and see how much concentration you are comfortable with and work from there.?

Again, it’s worth mentioning that tenders are not guaranteed. Markets change and stock prices can go up or down. We can’t predict the future so you should also consider the possibility that this may be the last time you’re able to obtain liquidity on your shares – we hope that won’t happen, but it’s not out of the realm of possibilities.

One note that’s important to mention… if you’re fortunate to be in a position to achieve life changing money or LCM for short, you probably should take it. What is LCM? No, I’m not talking about Lambos or private jets. I’m talking about money that can materially change you and/or your family’s life. That number is different for each and every one one of us.

My Dad grew up poor selling ice cubes on the streets of Borneo in post World War 2 Indonesia. His life changing money came when he started a business and was able to buy a home in San Francisco. He made it and was able to raise a family in America. Your life changing money is likely different - for some it may be putting money in a college fund for your kids to go to school or simply being able to pay off your college debt. For others, it can simply mean a year break from work to travel the world or raise your children.?

Now I get that most people won’t be in a position to achieve LCM off one tender, but I know for a fact that some are fortunate to be in that position. For those of you who are, you don’t want to be the person who went from LCM to $0 (or worse, negative) . This post speaks in a lot of generalities on purpose as we’re all different, but I can tell you one thing definitively - I have never met someone who took LCM and regrets it.?

So now if you’ve decided to or are considering participating in that tender, the more technical question needs to be addressed which is…

?? Which shares do I sell?

A lot of you who have worked at your company many years will have accumulated perhaps various kinds of equity including: ISOs, NSOs and RSUs. You may have started exercising some of those options and have stock already. This is where a great equity plan really kicks in. Those who started planning a year or more ago around their equity will likely be in a much more advantageous position to better manage your taxes.?

If you haven’t planned around it, don’t panic - taxes are just one consideration and shouldn’t be the sole reason to participate or not. Afterall, paying taxes means you made money and your stock has appreciated. This tender can be a great opportunity to start that planning process.

Selling shares that you’ve held onto for at least a year will mean your profits will be taxed at long-term capital gain rates which are lower than ordinary income or short-term capital gain rates. Those who exercised ISOs over a year ago will be able to convert ALL your gains to long-term capital gains. That can mean paying 23.8% capital gains rates versus 37% ordinary rates and can make a huge difference in your take home today.

If you have to sell unexercised options, then you’re unfortunately stuck paying the higher tax rates when you sell those in a cashless exercise. Selling unexercised options will always generate ordinary income (the highest tax rates), but you may be able to exercise ISOs at a lower rate in the same year. It's definitely less than ideal to paying a higher tax rate on one tranche so you can generate a lower tax rate on another tranche, but there is some benefit if you have the right plan in place.?

In a perfect tax situation, you’ll be able to sell all your shares at long-term capital gain rates, but of course, there are other considerations besides taxes. There are thousands of possibilities if you have multiple kinds of equity, so when deciding which types of equity to sell, you’ll need to start with what your plan is for the future and work backwards from there. As most often the case, it's best to create a long-term plan for your equity that spans not just the tender decision but in the year(s) going forward as well.?

?? Bringing it home?

Even as a CPA who has worked with startup equity for over 5 years, this stuff can get complex real quick. On top of the complexity, sometimes the best decision for you may go against your gut instinct. If you are not comfortable making those plans by yourself, or you are doubting your plan, it’s best to work with a financial and tax advisor who lives and breathes equity and can look out for your best interest.?

The long-term benefit you get from a sound financial plan can come back in magnitudes than what you’d pay for help. Trust me - I’ve seen the horror stories and I’m happy to share some if you want to grab a beer in San Francisco with me. Massive regret is not something most of us have experienced and my hope is that none of you will.?

“Nothing is more persuasive than what you’ve experienced first hand.” - Morgan Housel in Same as Ever: A Guide to What Never Changes

For those going through the decision process right now, I know that these decisions are complex, difficult, and can trigger a big emotional response. Hopefully this newsletter will help make things a bit clearer for you and give you the peace of mind to make the best decision for yourself.

And for those that are reading just to learn with hopes that you will one day soon have to make that decision, my fingers are crossed and let’s hope for a great 2024.?

As always, we’re here for you if you need us. Feel free to reply back if you need anything.?

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