Tender offers and secondary sales: cashing out private shares

What a tender offer or secondary sale is

As companies stay private longer, employees and founders can be stuck holding valuable shares they cannot easily sell. Tender offers and secondary sales are the two main ways to get liquidity before an exit. In a tender offer, the company or an outside investor offers to buy a set amount of stock from existing holders at a fixed price, often alongside a funding round. In a secondary sale, you sell your shares directly to a third-party buyer.

Either way, you are selling stock you own, so it is a taxable event in the year of the sale, even though the company never went public. The interesting question is not whether you owe tax, but what kind.

The default: capital gain on what you sell

In the ordinary case, selling shares you already own produces a capital gain or loss equal to the sale price minus your cost basis. If you held the shares more than a year, that is long-term capital gain, taxed at the lower 0, 15, or 20% rates, often plus the 3.8% net investment income tax. Held a year or less, it is short-term and taxed at ordinary rates.

Your basis and holding period depend on how you got the shares. The ISO holding-period rules still apply: selling option shares too soon can be a disqualifying disposition that turns part of your gain into ordinary income. And shares you have not actually acquired yet (unexercised options, unsettled RSUs) bring their own exercise or settlement tax along for the ride. So the first step before any tender is knowing exactly what you hold and how long you have held it.

The premium-above-value wrinkle

Here is the part that surprises people. Companies set the value of their common stock through a 409A valuation, and tender offers are very often priced above that value (frequently at the higher preferred-share price from a funding round). When the price you receive exceeds the company's fair market value, the excess can be characterized as compensation income, taxed at ordinary rates and potentially subject to employment taxes, rather than as capital gain.

Whether that happens turns on the facts. Treatment leans toward compensation when the company itself is the buyer, when only current employees are offered the deal, or when the transaction is not truly arm's length. It leans toward capital gain when an unrelated outside investor is buying from a broad group of holders at a negotiated price. The IRS has not issued definitive guidance, so this is a genuine facts-and-circumstances judgment.

QSBS, the holding clock, and company approval

Selling early can cost you more than rate treatment. If your shares might qualify for the qualified small business stock exclusion, selling before you meet the holding period can forfeit a large tax break, though a Section 1045 rollover into new qualifying stock can sometimes preserve it. That trade-off deserves a hard look before you tender shares that could have qualified.

There are also practical gates. Private shares usually carry transfer restrictions and rights of first refusal, so a secondary sale typically needs company approval. And the income gets reported, the capital portion generally on a 1099-B, any compensation portion through your W-2 with the related taxes. None of this is a reason to avoid a good offer; it is a reason to map the tax before you sign.

Tender offer questions people ask

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