Company-Run Tender Offers: Mechanics, Timing, and the 20-Business-Day Rule

The email arrives on a Tuesday: the company is running a tender offer. Eligible employees can sell up to 20% of their vested shares at $42 per share. The election window closes in 21 business days. You have three weeks to decide how much to sell, what tax bill you are creating, and whether to file a §83(b)-compliant election on any unexercised options you plan to exercise before tendering.

A company-run tender offer is a structured liquidity event where the company (often backed by a financial sponsor or strategic investor) offers to buy back common stock at a defined price. Unlike individual secondary transactions, tenders are governed by SEC tender-offer rules (primarily Rule 14e-1 under the Exchange Act) and must remain open for a minimum of 20 business days.

This guide walks through the mechanics, the legal timing requirements, and the tax and liquidity decisions employees need to make in the election window.

The structural pieces of a tender offer

The offer

The company or a sponsor designates a price per share and a maximum aggregate purchase amount. Typical structure: all vested common stock and early-exercised stock qualifies; unexercised options do not (employees must exercise first). Some tenders also include preferred stock held by investors.

The eligibility criteria

Tenders usually limit participation to current employees, specific classes of shareholders, or shareholders with minimum holding periods. Some tenders exclude directors or specify maximum sale percentages per holder.

The cap

Most tenders cap total dollars available. If the aggregate tendered amount exceeds the cap, pro-rata cuts apply. A common structure: the first $X of each holder’s tender is accepted 100%, the rest pro-rated.

The window

SEC Rule 14e-1 requires the offer to remain open for at least 20 business days. Companies typically run 20-30 business day windows with a possible 10-day extension if terms change materially.

The settlement

After the window closes and pro-rata allocation is calculated, wire transfers and share transfers occur within 5-10 business days. Proceeds flow through payroll for employees (with applicable withholding) or directly to shareholders in some structures.

SEC Rule 14e-1 requirements

Even private tender offers for privately-held stock can fall under Rule 14e-1 if the stock meets certain thresholds or if the company voluntarily structures the offer as a tender. The rule establishes:

• Minimum 20-business-day open period
• Prompt payment after close (customarily 3-5 business days, 10 days maximum)
• Withdrawal rights: tendering shareholders can withdraw until the offer closes
• Equal treatment of tendering shareholders at the same class

Rule 14e-1 applies to public tenders and to third-party tenders for registered securities. Private tenders run by the company for unregistered pre-IPO stock technically fall outside 14e-1 but most companies follow it as best practice because it provides a known legal framework and plaintiff’s-side protection.

Tax treatment of tender participation

Long-term capital gain (for exercised shares held 1+ year)

Shares held more than one year since exercise (and more than two years since grant for ISOs) sell at long-term capital gain rates. Federal: 20% above the top bracket threshold, plus 3.8% NIIT. State: varies, California 13.3%, New York 10.9%, Texas 0%.

Long-term treatment is the best tax outcome.

Short-term capital gain

Shares held less than one year since exercise sell at ordinary income rates. Federal marginal 37% plus NIIT plus state. Up to 50%+ combined depending on state.

Disqualifying disposition (ISO)

If you exercise ISOs and tender within one year of exercise or two years of grant (the “2+1” holding period), the tender is a disqualifying disposition. Part of the gain is reclassified as ordinary W-2 income. The employer issues a corrected W-2 with the ordinary piece added.

See the ISO secondary disqualifying disposition article for the full framework.

QSBS

If the shares are QSBS, the five-year holding period must be met to exclude gain under IRC §1202. Tendering before five years blows the exclusion unless a §1045 rollover is used to preserve QSBS in a replacement investment.

What to evaluate in the election window

How much to tender

Company caps usually limit individual tenders to 15-40% of vested holdings. Within that cap, the decision depends on:

• Tax cost of the sale at your marginal rate
• Your current liquidity needs (home purchase, tax bill, diversification)
• Your read of the company’s exit trajectory and expected IPO price
• Your alternative investment opportunities for the cash

A common framework: sell enough to diversify to a reasonable concentration target (usually under 30% of net worth in any single security) and fund imminent cash needs, but not more.

Whether to exercise first

Many tenders require vested shares to already be exercised. If you hold vested options, you must exercise (and pay the exercise price and applicable tax) before tendering. Exercising creates:

• Ordinary income (for NSOs) on the spread between 409A and strike
• AMT preference item (for ISOs) on the spread
• Start of holding periods for LTCG and QSBS

Exercising and immediately tendering in a cashless structure is typical. Some tenders allow this as a single transaction; others require two separate events.

Withholding and cash flow

If you tender NSOs that you exercise at the same time, withholding is usually 22% federal (37% above $1M of supplemental wages), plus state. Your marginal rate is often higher, creating a shortfall at tax time.

Set aside additional cash from the tender proceeds to cover the shortfall. A rule of thumb: if federal marginal is 37% and withholding is 22%, set aside 18% of the exercise gross. Plus state.

Common tender structures

Structure	Sponsor	Typical pricing	Notes
Issuer-run with follow-on primary	Company	Often at preferred price	Company uses primary proceeds to fund
SPV-sponsor tender	Outside investor SPV	Below preferred, above 409A	New investor takes shares
Concurrent with financing	Lead new investor	Pre-money financing preferred price	Provides secondary to existing holders
Pure buyback	Company balance sheet	Below preferred typically	Company retires shares

Each structure has different cap-table consequences. Buybacks retire shares, which concentrates ownership among remaining holders. SPV-funded tenders transfer shares to a new party. Primary-backed tenders add new investors and dilute slightly.

The pro-rata cut

If the aggregate dollar tender request exceeds the cap, pro-rata cuts kick in. Typical structure:

• First tier: each holder’s first $X of tender is accepted 100%.
• Second tier: amounts above $X are pro-rated by total oversubscription.

If cap is $200 million and total requested is $300 million, the second-tier accepts roughly 50%. If the first-tier floor is $100,000, a holder requesting $500,000 receives: $100,000 plus 50% of the remaining $400,000 = $300,000 accepted, $200,000 returned.

Plan assuming you will get less than you request in oversubscribed tenders.

Information you should get from the company

The tender materials should include:

• Offer letter with price, caps, eligibility, and timing
• Purchase agreement (the contract you sign)
• Questions and answers document
• Tax consequences summary (usually includes caveats but provides framework)
• Form W-9 or similar for U.S. tax reporting
• Any special provisions for specific classes of holders

If the materials are thin, ask for clarification. Do not sign a purchase agreement where the key tax or timing provisions are ambiguous.

Frequently asked

Can I withdraw my tender after submitting?

Yes, until the offer closes. Rule 14e-1 guarantees withdrawal rights during the open window. After close, the tender is binding.

What if the company’s tender price is below my purchase price (for exercised ISOs)?

You can still tender. The result may be a capital loss if you hold short-term, or an opportunity cost if the tender is below what you could get elsewhere. Evaluate whether tendering at this price is better than holding.

Does tendering trigger disqualifying disposition on my ISOs?

If the tender happens within the 2+1 holding window (2 years from grant, 1 year from exercise), yes. Ordinary income is recognized on the bargain element (409A at exercise minus strike), reclassified from AMT-preference to W-2 wages. The employer reports this on a corrected W-2.

Can I early-exercise and tender the same shares?

If your plan allows early exercise of unvested options, you can exercise, but unvested shares are generally not eligible for tender participation. Read the eligibility criteria.

What about double-trigger RSUs?

Most tender offers exclude double-trigger RSUs because they have not settled. Some tenders include them with settlement on the tender closing date, converting the tender into an RSU liquidity trigger. Read your specific tender materials.

Does a tender offer trigger a 409A revaluation?

Often yes. A tender at a defined price is a market signal. Many companies refresh 409A either just before the tender (to defend the price) or immediately after (to reflect clearing data).

Next step

When the tender announcement arrives, do three things in the first week: pull your equity portal to confirm eligible share count, calculate the tax cost at your marginal rate, and identify specific cash needs within the next 12 months. Then set your target tender amount before the window closes. Avoid deciding in the last 48 hours when stress and time pressure impair judgment.