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Because most funds raised through venture capital are typically earmarked for a growth plan, your company may need to find other sources to fund a tender offer. This could mean executing a round of financing that is earmarked for a tender (if your VC firm wants more ownership) or finding an interested outside investor. In rare cases, your company may be over-capitalized and capable of funding a tender offer on its own.
Before deciding whether a tender offer makes sense for your organization, there are a few factors you’ll want to consider.
"There is a psychological difference between holding a piece of paper that you are told has value and holding cash."
Contrary to popular belief, a tender offer can actually enhance employee engagement. Many CEOs believe that if they give employees cash ahead of an exit event, their staff will no longer be motivated to stay and work towards that exit, but that’s rarely the case. Experience at numerous companies shows that most don’t see a mass exodus following a liquidity event. Rather, employees become more engaged because they’re appreciative of the liquidity, and it makes their contributions to the company real. There is a psychological difference between holding a piece of paper that you are told has value compared to holding cash. It can also boost recruitment efforts. For instance, if your company does regular liquidity events, new employees know they don’t have to wait for an exit to see liquidity for their equity compensation.
While there are different types of liquidity events, tender offers are selected most often. In addition to letting you retain control over your cap table, tender offers are fair, transparent and an excellent tool for creating excitement. They can even help improve productivity, engagement, retention and recruitment - all of which lifts your top line.
If your employees have been tempted to sell their options and shares, a tender offer can mitigate common risks by controlling how – and to whom – your employees sell their options and shares. That said, to sufficiently balance the needs of both your business and your employees, there are a few things to consider.
Fortunately, there are ways to proactively address this compensatory challenge. One way is the use of a tender offer, a company-wide, broad-based and controlled liquidity event open to all employees deemed eligible by the company. Many companies choose to extend this offer to former employees and early investors as well. Once you present the offer, employees choose how much of their holdings (if any) to tender for sale, generally up to a predefined limit.
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The average time to IPO has doubled to nine years today from four in 1999, meaning employees are waiting longer than ever before they can cash out. This predicament can result in more than just low morale. It can also induce some employees to seek alternative ways to convert their holdings into cash. Regardless of whether they choose to sell to an unknown investor or go through a secondary marketplace, these moves could lead to a loss of control over your cap table or the deterioration of your company’s reputation in the eyes of investors, talent and customers.
Employee stock options and shares can attract, retain and reward the talent you need to grow your business, but they can also lead to challenges for private companies, particularly if an exit event is not around the corner.
Boost your business with a tender offer
Liquid Gold
It’s not uncommon for employees working at venture capital-backed companies to spend considerable time speculating about the timing of a future IPO or acquisition. For companies that aren’t planning to have an exit event within the next year or two, a tender offer can help remove that distraction by giving employees some cash to meet their personal financial needs. Frequently, this frees up employees to focus more on long-term outcomes, enhancing productivity in the process
Why a tender offer?
Secrets of tender offer success
Tender offers have become an increasingly popular tool for leading companies on the forefront of change. And it’s easy to understand why, as they offer a host of benefits when executed properly. To determine if they’re right for you, pay close attention to employee morale, the financial state of your company and the investment appetite of your existing VCs and potential new investors. Once you understand your company’s needs, a well-organized tender offer can go a long way towards meeting them – and boosting your business in the process.
Taking the liquidity leap
Fund it
For a tender offer to work, the buyer has to make sure the employees’ shares or options are appropriately valued. It’s a fact that private company management has asymmetric access to information and knows more about the state of the company than employees. Therefore, if the price is set too low, employees could have a cause of action against the company based on its presumed reliance on insider information to set the price.
To avoid this scenario, many companies use an intermediary to mediate liquidity events. In such a case, the intermediary would act as an impartial third party that presents the offer from the buyer to the employees. The employees could then choose to accept the offer or not and elect to tender a certain number of shares, at which point the intermediary would execute the transaction with the buyer.
Price it
Timing a tender offer inappropriately can result in some unwelcomed challenges. If a company decides to use its excess capital to fund a tender offer, and then the markets turn, it may find it’s ill-equipped to make it through the next few years. For this reason, it’s best to work with your board and investors when contemplating a tender offer to ensure your company is properly capitalized for the long run.
Leading up to your first tender offer, you may also want to work with your board and investors to determine how often you want to run these events. Almost right after your first event, employees will want to know when the next one is coming. It’s helpful to either have a set schedule in advance or to clearly communicate from the outset that the tender offer is a one-time proposition.
Time it
Show them the money!
Liquidity without the IPO
Shareworks enables private companies to offer liquidity to attract and retain employees. Companies can initiate an event, manage it efficiently and finish with certainty. Now you’re free to run events as often as you like.
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Tender offer (n)
A company-wide, broad-based and controlled liquidity event open to all employees deemed eligible by the company.