Tender offers can be an exciting opportunity to turn private company equity into cash. But if you’re preparing to participate, you might quickly realize it’s not always as simple as selling everything you own. Companies typically set eligibility rules and seller limits to control who can participate – and how much they can sell.
Here’s what you need to know before you elect to participate in a tender offer.
Why Companies Set Limits
Tender offers aren’t designed to be a free-for-all. Companies impose rules for a few important reasons:
- Cap Table Management: One of the benefits of being a private company is that you have more control over knowing your shareholders. Too much turnover in ownership can complicate the shareholder list. After a certain number of shareholders, private companies are held to reporting standards similar to public companies, which can create burdens before the company is ready to report.
- Retention: Companies want to give employees liquidity, but not so much that they lose incentive to stay and grow the business.
- Regulatory Concerns: Securities laws require careful structuring of who can participate and how.
The result: most tender offers include seller restrictions.
Common Seller Limits
If you’re participating in a tender offer, you may encounter:
- Percentage Caps
Employees may be limited to selling a certain percentage of their vested shares. This ensures you can access some liquidity while maintaining meaningful ownership. - Minimums and Maximums
- Minimum: To keep the process efficient, companies may require you to sell at least a set number of shares.
- Maximum: Executives or large shareholders may face special limits to avoid flooding the sale with too much stock.
- Employment Status & Tenure
Tender offers often favor current employees and employees who have been at the company for a certain period of time. Former employees with vested shares may also be included at times. - Role-Based Eligibility
Senior executives, directors, or insiders may face stricter rules due to insider trading regulations or governance concerns.
Eligibility Requirements
Not every shareholder automatically qualifies for a tender offer. Companies typically set eligibility rules such as:
- Share Type: Common vs. preferred stock may be treated differently.
- Vesting Status: Only vested shares are eligible to sell.
- Holding Periods: Some companies require a minimum holding period before sale.
Always check the tender offer documents for specifics – these outline exactly who can sell and under what terms, helping you better understand what you might be able to sell and why.
Why This Matters for You
Understanding seller limits and eligibility helps you plan ahead.
- Tax Planning: If you’re only able to sell 5% of your shares, for example, you’ll want to consider which shares to sell for the best tax outcome.
- Cash Flow: Knowing limits upfront helps you forecast how much liquidity you’ll actually generate.
- Retention Impact: Remember, part of the design is to keep you invested – literally – in the company’s future.
What You Can Do Next
- Review Documents: Tender offer paperwork spells out seller limits and eligibility.
- Ask Questions: Your company’s stock administrator or HR team should clarify anything that’s unclear.
- Plan Ahead: Talk with your tax or financial advisor before making decisions.
Tender offers can be life-changing liquidity events—but participation isn’t unlimited. By understanding seller limits and eligibility rules, you can set realistic expectations, make smarter tax decisions, and align your sales with your long-term financial plan.
