Secondaries and tender offers: turning equity into cash before an exit

Startup equity is famously illiquid: you own something valuable and cannot spend it. Secondaries are the exceptions, and they have become common enough that employees should understand them before the email arrives with a two-week deadline.

The two shapes

A company-run tender offer. The company organises it: an approved buyer — an existing investor, a new investor, or the company itself — offers a fixed price per share, eligibility rules define who may sell and how much, and everyone transacts at the same price in the same window. Orderly, documented, and the only version most employees will see.

A direct secondary. An individual sells to a buyer they found, subject to the company’s consent. Rarer, usually for larger holders, and frequently blocked.

Why you cannot just sell

Private shares carry restrictions that exist precisely to prevent ad hoc transfers:

• Right of first refusal (ROFR). The company may buy on the same terms before your buyer can.
• Board consent. Most stock agreements require approval for any transfer.
• Transfer restrictions. Many plans prohibit transfers outright until an exit.
• Investor rights. Co-sale and secondary-participation rights can attach to your sale.

Ignoring these does not produce a grey-area sale; it produces a void one. The company’s books still show you as the holder, and you have taken someone’s money.

What eligibility usually looks like

Tenders are designed to reward tenure without emptying the cap table. Typical terms:

• Current employees, often with a minimum tenure.
• Former employees sometimes included, sometimes not.
• A cap per person — commonly a percentage of vested holdings.
• Vested shares and vested options only.
• A single price for all sellers, set by the buyer and the company.

The maths on a real grant

Your grant from part 4: 48,000 options, 36,000 vested, strike $0.25. A tender opens at $5.00 per share with a 25% cap on vested holdings.

eligible to sell   36,000 × 25%           =  9,000 shares
exercise cost      9,000 × $0.25          =    $2,250
gross proceeds     9,000 × $5.00          =   $45,000
before tax         $45,000 − $2,250       =   $42,750

Two things to plan for. First, you must exercise before you can sell — that $2,250 is cash out before any arrives, and companies sometimes offer same-day exercise-and-sell to solve it. Second, the tax: exercising NSOs creates ordinary income on the spread, and selling creates a further gain or loss. Both land in the same tax year, and ISO holding periods (part 12) are almost never met in a tender, which makes it a disqualifying disposition.

What it does to everyone else

It can move the 409A. Arm’s-length sales of common are evidence of common stock value. A large tender at $5.00 makes it harder to argue the next 409A is $2.00, which raises strike prices for future hires. Companies weigh this deliberately.

It changes the register. New holders, sometimes many, each with information rights and each one more signature at the next financing.

It sets an expectation. Run one tender and employees will ask about the next one. That is a compensation policy decision, not a one-off transaction.

If you are running one

• Decide eligibility before announcing. Changing the rules mid-window destroys trust faster than not running it at all.
• Tell people the tax shape in writing, generically, and tell them to get advice. Do not give individual tax advice.
• Check Rule 701 and securities compliance, including for any repurchase by the company, with counsel.
• Model the 409A impact first, because future hires pay for it in higher strikes.
• Compute eligibility from the cap table, not from a spreadsheet someone maintains separately — vested balances on the transaction date are the only defensible basis.

If you are being offered one

Ask: what is the price, who is buying, what is my cap, what does exercising cost me in cash, what does the tax look like this year, and when does the window close. Then decide with an accountant, not on the last day.

Selling some is not disloyalty. The people who never take partial liquidity are the ones for whom a flat outcome five years later is a genuine financial problem.

Next

Part 14 turns all of this around and looks at it from the other side of the table: how to value an equity offer you are being made, with the arithmetic done properly.