Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Tender Offers for Pre-IPO Liquidity
Transcript
- Lucas: So let's talk about something that comes up in almost every pre ipo planning session I've sat in on: the tender offer. Not the IPO itself, not the lockup — but that moment before you file, when a founder or early employee gets a chance to sell some shares to a third-party investor at a set price. Luna: Right — it's like a mini-liquidity event before the real one. I've seen it described as 'cashing out a bit without ringing the bell.' Lucas: Exactly. And the timing matters a lot. We're in mid-July 2026 — the S&P 500 is up about 8 percent year-to-date, the VIX is hovering around 19, and IPO windows are open but selective. Founders are looking at this moment and thinking, 'Do I wait for the IPO price, or do I take some chips off the table now?' Luna: And the tender offer is how you do that, structurally. So how does a typical one work? Walk me through a real example. Lucas: Sure. Let's use a hypothetical but realistic case. Say there's a cybersecurity company — we'll call it ShieldLayer — that's been growing fast, revenues around $300 million, and it's thinking about an IPO in early 2027. The board decides to run a tender offer six months before filing. They let current shareholders — founders, early employees, maybe some angel investors — sell up to 20 percent of their holdings. Luna: And who buys those shares? It's not the company itself, right? Lucas: No, it's typically a crossover investor — a mutual fund or a hedge fund that wants to get in before the IPO. They set a price, say $60 per share, based on the last 409A valuation plus a premium. The company facilitates the process, but the money comes from that outside buyer. Luna: So the founder gets liquidity, the investor gets a pre ipo stake. But what's the trade-off for the company? Lucas: The biggest one is dilution. When new shares are issued or existing ones are sold, the ownership pie gets sliced differently. But more subtly, there's a signal you send to underwriters. If a tender offer clears at $60, and then the IPO prices at $65, that's a tight range — it shows discipline. But if the tender offer is at $60 and the IPO prices at $50, you've got a problem. The underwriters will ask, 'Why did insiders get to sell at a higher price than public investors?' Luna: That's a reputational hit. So it forces the company to be realistic about valuation. I've seen cases where tender offers actually help anchor the IPO price — it's a data point. Lucas: Exactly. And there's a tax angle too. In the US, if you sell shares in a tender offer, you trigger a taxable event right then. But some founders use a structured exchange — they roll the proceeds into a qualified opportunity fund to defer the capital gains tax. We covered that in episode 110, actually. Luna: Right — the tax-deferred exchange. So the tender offer isn't just about timing liquidity; it's also about managing your tax bill. Now, what about employees? They often have the most concentrated risk — all their net worth in one company. Lucas: That's where tender offers become really important for retention. You let early employees sell 10 or 20 percent of their vested options. They get cash, they feel less stressed, and they're more likely to stay through the IPO lockup. I've seen companies lose key engineers right after lockup expiration because they were waiting for that first liquidity event. A tender offer can prevent that. Luna: So it's a retention tool disguised as a liquidity event. How common is this right now? Are we seeing more tender offers in 2026? Lucas: Definitely. With the IPO market recovering — we've had a few big tech listings this year, but it's still selective — companies that are serious about going public often run a tender offer six to twelve months before filing. Data from the past few quarters shows that about 40 percent of US venture-backed companies that IPO'd in 2025 had a pre ipo tender offer. That number is probably higher now. Luna: That's significant. And it's not just for big unicorns. I remember a mid-stage SaaS company last year — they did a tender offer at a $2 billion valuation, then IPO'd at $2.2 billion. The employees who sold got a nice payday, and the ones who held got a bit more. It worked out. Lucas: But it doesn't always work out. If the market turns, the tender offer price could end up being higher than what the IPO delivers. Remember 2022? Some companies did tender offers at peak valuations, then the IPO market froze. Those investors who bought at $60 ended up holding shares that later traded at $40. Luna: So there's risk on both sides. The buyer is taking a pre ipo bet. The seller is giving up potential upside for certain cash. It's a classic risk-reward trade. Lucas: Right. And that brings us to the role of the independent fiduciary. The board has to approve the tender offer, and they need to hire a third-party advisor to evaluate whether the price is fair to all shareholders. That's not optional — it's a legal requirement in many cases to avoid lawsuits from minority holders. Luna: So the process has guardrails. It's not just 'pick a price and let people sell.' There's governance. Now, how does a tender offer compare to a secondary sale — where a founder sells directly to a buyer without a company-wide offer? Lucas: A secondary sale is more targeted. It's usually a single large shareholder negotiating directly with a fund. A tender offer is broader — it's open to a whole class of shareholders for a set period, typically 20 to 30 business days. The advantage of the tender offer is that it's more democratic: all eligible employees get to participate. The disadvantage is that it's more complex and expensive to administer. Luna: And the company usually bears the cost of that administration. But it's worth it if you want to create goodwill and align incentives. I've talked to CFOs who say the tender offer is the single best thing they did to keep their team together before the IPO. Lucas: Yeah, and it's not just about the money. It's about trust. When employees see the company proactively creating a liquidity path, they feel like owners, not just cogs. That matters when the IPO lockup period — typically 180 days — means they can't sell their public shares right away. Luna: Speaking of lockups — we did an entire episode on those. But the tender offer effectively gives employees a way to get cash before the lockup even starts. Lucas: Exactly. It front-loads liquidity. And for founders, it can be a way to diversify without waiting years. A lot of founder wealth is tied up in a single stock. A tender offer lets them sell 10 or 15 percent, pay down debt, buy a house, whatever — while still keeping a meaningful stake. Luna: So if you're a founder listening, and you're thinking about an IPO in the next 12 to 18 months, a tender offer should be on your radar. But timing is key — too early, and the valuation might be too low; too late, and you're competing with the IPO process itself. Lucas: Right. You want to give the market enough time to digest the tender offer results before you file your S-1. Usually, three to six months of gap is ideal. That way, the underwriters can use the tender offer price as a reference point, but it's not so close that it creates confusion. Luna: And if the IPO gets delayed — which happens — the tender offer still gave people liquidity. That's a hedge against uncertainty. Lucas: Exactly. Look, we do these episodes every week, and they take a lot of research and prep. If you find them useful for what you're building or running, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Even small contributions add up and let us keep the show ad-free and focused on the specifics that matter. Lucas: Anyway, back to tender offers. One last nuance: some companies structure the tender offer as a 'Dutch auction' — shareholders specify the price they're willing to sell at, and the buyer fills from the lowest price upward. That can be more efficient than a fixed-price offer. Luna: Interesting. So the price discovery happens within the tender offer itself. That could actually help set a more accurate valuation for the IPO. Lucas: Exactly. And it reduces the risk of the buyer overpaying. So if you're a founder or an early employee, the key takeaway is: don't wait until the IPO to think about liquidity. A well-timed tender offer can give you cash, retain your team, and even help your IPO pricing. It's one of those tools that looks like a financial instrument but is really about people and trust. Luna: Well said. That's the kind of practical insight that makes this show worth the listen.