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Step 3: Understand the legal requirements
A company-wide, broad-based and controlled liquidity event open to all employees deemed eligible by the company.
A tender offer lets current investors increase their ownership stake without diluting existing owners. In many cases, such a liquidity event would be initiated by the investors themselves, although companies have been known to approach investors to trigger the process.
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.
When establishing the parameters surrounding who can sell their shares and options in a tender offer, there are three factors you should consider:
Tender offers are typically available to employees who’ve been with the company for a certain number of years—a number that can be as low as two or as high as four, depending on your company’s preferences.
Early employees and executives may have significant holdings in a company. Even with having only 10% of their equity eligible it could result in a large cash value which could skew the availability of the tender offer for other participants. As a result, companies will often set a maximum dollar amount that an employee can sell.
Step 1: Get stakeholders on the same page
Percentage of eligible holdings
As the average lifespan of VC-backed private companies continues to grow – 11 years at last count – it’s understandable that employees grow anxious for the opportunity to cash out their shares and stock options. For later-stage private companies, it’s easy for IPO-fixation to set in, which can be followed by a temptation for employees to sell on secondary markets. But more organizations are turning to tender offers as a way to maintain employee morale and retain control of their cap table. However, a tender offer isn’t something to rush into. To do it right and realize its associated benefits, you need to take a deliberate approach that maximizes efficiency and leverages available technologies. This can typically be achieved through six integral steps.
Step 6: Prioritize clear communication
An eye on the future
If you’re a profitable company—or a company that doesn’t plan to go public, but has access to capital—you may consider hosting regular events, either on an annual basis or multiple times per year. Conversely, you will want to ensure your employees clearly understand that tender offers will be irregular events or that there is no expectation of a future one. Capital markets and company performance can change quickly and you do not want employees making personal financial decisions based on the perception of a future tender that isn’t guaranteed to happen.
A first step in issuing a tender offer is ensuring everyone is on board. This means understanding the different concerns of your various stakeholders.
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If your company is sufficiently capitalized and can finance a tender offer on its own, it may opt to do so to reward employees for their ongoing contributions and decrease the total number of outstanding shares.
With a firm grasp of the potential impact a tender offer will have on your company’s ownership, it’s time to address the wide-ranging list of legal requirements. Essentially, your legal department will need to make sure the offer adheres to the company’s bylaws and shareholders’ agreement, provides the appropriate disclosures and follows the right process for tendering and selling private shares.
Once all pertinent questions are asked and addressed, management will position the event to both the board and, potentially, current investors. Specifically, the company will want to clearly lay out the benefits of such an offer – namely, how it will help reward long-term employees looking for liquidity and meet investor demand for a greater (or new) ownership stake.
"Most companies only make between 10-25% of vested holdings eligible. You want employees to retain skin in the game."
Tender offer (n)
Step 4: Determine your buyers
Step 2: Run financial models for the tender offer
If outside investors want in, the company may opt to issue a tender offer if the investor(s) would be valuable to have around the table or has specific ownership requirements. Less commonly, management might approach external investors to finance the offer if existing investors don’t express interest or do not have the capital available for further investment.
Liquidity without the IPO
FIND OUT HOW
Show them the money!
Most companies only make between 10 to 25 percent of vested holdings eligible for tender—this includes shares, restricted stock, RSUs and options. There are a couple reasons for this. For one, you want your employees to retain skin in the game—and remain invested in your company’s performance. Second, this will provide a way to manage the potential size of the tender offer.
For instance, a CFO will typically be interested in the availability and source of capital for a tender offer and will want to ascertain the effect the offer will have on ownership. Legal will want to know whether your company will broker the deal itself and assume the liability around the proper valuation of shares and disclosure of information, or employ an intermediary to help. For their part, CEOs and founders will need to determine if the liquidity event will heighten employee alignment over the long term or decrease it due to lower employee ownership, and if the offer rewards employees appropriately.
Step 5: Determine your sellers
Maximum dollar amount
Tender Offer Success Is
Only 6 Steps Away!
For your tender offer to be a success, communication is key. Your employees must clearly understand what a liquidity event is, the associated benefits, who is and isn’t eligible, as well as how the process works. Leading up to the event, your human resources team will need to brief your employees on a wide range of issues—including the importance of having employees hire their own legal and tax advisors; what happens in the event of a pro-ration (i.e. if too many shares are tendered and everyone has to take a lower percentage); the details of the payment distribution process, to name a few.
Financial models are generally required to determine the parameters of a proposed tender offer. In this step, the CFO and finance department will assess various scenarios for the liquidity event, such as what the distribution of the tender will look like based on how many shares employees tender, and the effect of the event on the company’s cap table. Ultimately, these models should help you predict the size of the tender offer and how ownership of the company will change based on the transactions.
By following these six steps, you should be poised to launch a smooth and successful liquidity event. You may also want to decide if you will hold future events and if they become a frequent occurrence.
One of three buyers would typically be interested in your employees’ existing shares and stock options:
By being upfront and approaching your next tender offer in a deliberate, systematic way, buyers, sellers and management alike should all walk away winners, and make the company stronger in the process.
Due to the complexity of this process, many companies choose to employ outside counsel to provide the necessary securities law expertise. While this makes eminent sense, the cost of outside counsel can skyrocket if a tender offer is not executed efficiently—which is why working with an intermediary with a robust software platform is a wise move. By automating the process, all information and documents can be made available at the click of a button, reducing the amount of time external counsel would otherwise need to expend. You can save time and effort if payments and the transfer of shares can be executed by software.
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