Tender Offers: How They're Taxed and How Much to Sell
If you work at a private company, a tender offer may be your first chance to turn equity into cash. The window is usually short, the documents are long, and the decision is yours alone.
Here’s how tender offers work, how they’re taxed, and a simple way to decide how much to sell.
What a tender offer is
A tender offer is an offer to buy shares from current and former employees (and sometimes early investors) at a set price, during a set window. The buyer is either the company itself or outside investors, often as part of a funding round.
Common features:
- A fixed price per share
- A window that’s often around four weeks
- A cap on how much each person can sell, often a percentage of vested shares
- Rules on which shares are eligible, for example vested shares only, or vested options you exercise as part of the sale
Read the offer documents closely. They explain the price, the limits, how taxes will be handled, and what happens if more people want to sell than the buyer will take.
How tender offer sales are taxed
The tax depends on what kind of shares you sell and how long you’ve held them.
Shares from exercised ISOs
If you exercised ISOs and you’ve held the shares at least 2 years from the grant date and 1 year from exercise, the whole gain over your exercise price is a long-term capital gain. If you haven’t, the sale is a disqualifying disposition and the spread at exercise is ordinary income.
Shares from exercised NSOs
You were taxed on the spread when you exercised. The sale creates a capital gain or loss compared with the value at exercise: long-term if you’ve held the shares more than a year.
Exercising and selling at the same time
Some tender offers let you exercise vested options and sell the shares in one step. The spread is ordinary income. For NSOs, that comes with payroll taxes and withholding. For ISOs, it’s a disqualifying disposition, usually with no withholding, so set aside money for the tax.
Shares from vested RSUs
You were taxed when the RSUs vested. The sale is a capital gain or loss compared with the value at vest.
When part of the price may be compensation
If the tender price is above the shares’ fair market value, especially when the company itself is buying, part of what you receive may be taxed as compensation (ordinary income) instead of capital gain. The offer documents usually say how the company plans to report it. Ask your tax advisor if it’s unclear.
Which shares to sell first
When you have more than one kind of share, the order matters. In general, start with shares that cost the least in tax:
- Shares that already qualify for long-term capital gains, like ISO shares past both holding periods
- Shares with a high cost basis, like recently vested RSU shares
- Shares or options whose sale creates ordinary income
Hold back shares that are close to a better tax treatment, such as ISO shares a few months from a qualifying disposition, if you’re comfortable waiting.
How much to sell
Price and taxes matter, but they shouldn’t be the only factors. A few questions that help:
- What would happen if the stock went to zero? Sell enough that you’d be okay financially.
- What would happen if the stock grew ten times? Keep enough that you wouldn’t regret selling.
- What is the money for? A house down payment, an emergency fund, paying off debt or building a diversified portfolio all justify selling.
- How much of your net worth is in this one company? Private company stock is illiquid and risky, and your salary depends on the same company.
- When is the next chance to sell? Tender offers don’t follow a schedule. There may not be another one for years.
Many people end up selling the maximum they’re allowed, or close to it, the first time they get the chance. Others sell a portion and keep the rest for the potential upside. Both can be reasonable. What matters is choosing on purpose.
After you sell
- Set aside the tax. Put the estimated tax in a separate account or Treasury bills right away.
- Check your safe harbor. A large sale can mean an underpayment penalty if your withholding and estimated payments fall short. Here’s how the safe harbor rules work.
- Revisit your AMT credit. If you paid AMT when you exercised ISOs, a sale may let you recover some of it.
- Put the rest to work according to a plan, not all at once in whatever is popular that week.
Common questions about tender offers
Do I have to participate in a tender offer?
No. Participation is voluntary. You can sell some, all, or none of the eligible shares, up to the offer’s limits.
Is a tender offer taxed as capital gains?
Often, but not always. It depends on what shares you sell, how long you’ve held them and whether part of the price is treated as compensation.
Can I sell unvested shares in a tender offer?
Usually not. Most tender offers are limited to vested shares or vested options.
Should I exercise options just to sell them in a tender offer?
If the offer allows it, exercising and selling at once can turn options into cash without paying to exercise up front. The spread is taxed as ordinary income, so compare that with the tax treatment you’d get by waiting.
Get help before the window closes
A tender offer window goes quickly. If you’d like help working through the numbers, the Memento Snapshot is a free first look at your equity and taxes.
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Disclaimer: This content is for informational purposes only and is not tax, legal or investment advice. The terms of each tender offer differ; read the offer documents and consult a qualified tax professional. Memento Financial Planning is a Registered Investment Adviser in the Commonwealth of Massachusetts.