A private company tender offer is a formal, time-limited invitation for shareholders to sell some or all of their shares at a set price, either back to the company itself or to an outside buyer. For employees holding stock options or restricted shares and for early investors, it is often the only realistic way to turn private equity into cash before an IPO or acquisition. Federal law requires the offer to stay open for at least 20 business days, and you keep the right to withdraw your shares while it is open. What you actually walk away with, though, depends on your contractual transfer restrictions, the offer’s structure, and how the IRS characterizes the payout.
Who Is Buying Changes Everything
Two kinds of offers show up in the private market, and the difference matters for both your legal path and your tax bill.
An issuer tender offer is the company buying back its own shares. Boards run these to give long-tenured employees a way to cash out, to consolidate ownership, or to put idle cash to work. Because the company is both the buyer and the entity whose value is being priced, the offer typically waives the transfer restrictions in your stock agreements for the duration of the window.
A third-party tender offer comes from an outside buyer, usually a private equity firm, venture fund, or strategic acquirer building a position. These are more common in later-stage startups, and some now run through secondary-market platforms that match private sellers with institutional buyers in structured auction cycles. A third-party offer does not automatically waive your transfer restrictions. If an outside buyer approaches you, confirm with the company that your sale won’t trigger a right of first refusal or a board veto before you sign anything.
Check Your Transfer Restrictions First
Before anything else, pull your stock purchase agreement, shareholder agreement, or operating agreement and read the transfer provisions. Nearly every private company restricts who can sell shares and how. Ignoring these restrictions can void the sale entirely.
The most common one is a right of first refusal. A ROFR gives the company, and sometimes other shareholders, the right to buy your shares at the same price and terms before you sell to anyone else. You typically have to notify the company of the proposed sale, including price and buyer identity, and wait a set number of days for the company to decide whether to match. If the company passes, secondary refusal rights may kick in for other shareholders.
Many agreements also require board consent before any transfer, and “reasonable” grounds for refusal are broad. Some agreements prohibit transfers to competitors outright or require buyers to meet accredited-investor thresholds. If your shares came from an equity compensation plan, the plan documents may add blackout periods around financing rounds or fiscal year-ends. In community property states, spousal consent may be required before you can transfer shares treated as marital property.
How the Offer Price Gets Set
Private shares have no ticker, so pricing starts with an independent appraisal called a 409A valuation, which establishes the fair market value of the common stock. Companies are required to obtain or update a 409A valuation before certain events, including equity grants and liquidity events like tender offers.
The tender offer price often starts at the most recent 409A number but doesn’t have to match. Buyers frequently offer a premium above the 409A value to attract enough participation, especially when the company is growing fast and employees know it. In issuer-led offers the board sets the price. In a third-party deal the price reflects the outside buyer’s own assessment, which may run higher or lower than the internal figure.
For larger or more sensitive transactions, the board may commission a fairness opinion from an independent financial advisor evaluating whether the price is fair to shareholders from a financial perspective. No federal rule requires one for every private tender offer, but they show up most often in deals with multiple share classes that have conflicting economic interests, transactions where directors have personal financial stakes, and buybacks from passive shareholders who lack insider financial information.
The 20-Day Window and Your Right to Withdraw
Regulation 14E under the Securities Exchange Act of 1934 applies to tender offers for both registered and unregistered securities, including private company shares.1U.S. Securities and Exchange Commission. Commission Guidance on Mini-Tender Offers and Limited Partnership Tender Offers Two rules from that regulation matter most.
First, any tender offer must stay open for at least 20 business days from the date it is first sent to shareholders.2eCFR. 17 CFR 240.14e-1 – Unlawful Tender Offer Practices You have time to read the documents, ask questions, and consult a tax advisor. Don’t rush.
Second, you can change your mind. Shareholders have the right to withdraw tendered shares while the offer remains open.3eCFR. 17 CFR 240.14d-7 – Additional Withdrawal Rights If the company’s outlook improves or you simply reconsider, you can pull your shares back before expiration with no penalty. The offer’s anti-fraud provisions also prohibit the buyer from making misleading statements or omitting facts a reasonable shareholder would need to decide.
Employees whose shares were issued under Rule 701 compensatory plans get one more piece of protection. If the company sold more than $10 million in securities under Rule 701 within any 12-month period, it must provide enhanced disclosures, including financial statements and a summary of material risks.4eCFR. 17 CFR 230.701 – Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation If you got your shares through an equity plan, ask whether that threshold was crossed; the answer determines how much financial detail you’re entitled to see.
The Documents and How to Tender
When the offer launches, eligible shareholders receive two central documents. The Offer to Purchase spells out the price per share, the maximum shares the buyer will accept, the expiration date, and any conditions such as a minimum participation threshold that lets the buyer walk if too few shareholders tender. It also includes financial information about the buyer in a third-party deal, or about the company in an issuer offer, so you can judge whether the buyer can actually fund the purchase.
The Letter of Transmittal is the form you complete to tender your shares. It specifies how many shares you’re selling and collects your taxpayer identification number for tax reporting. Signing it accepts the terms of the offer and authorizes the transfer agent or depositary to move your shares. Identify your certificates or ledger entries carefully; errors slow processing. Most companies now run the entire process through a secure online portal with electronic signatures, though some older companies still require mailing original stock certificates to a designated depositary bank.
Proration and Escrow: What You Actually Receive
If more shareholders want to sell than the buyer will purchase, the offer is oversubscribed and proration takes over. Instead of filling orders first-come, the buyer purchases the same proportional percentage from every participant. If the buyer wants 100,000 shares and shareholders tender 200,000, each seller gets to sell half of what they offered.
Payment typically arrives within a few days to two weeks after the offer expires and the final share count is tallied. But in many tender offers, particularly third-party deals, the buyer withholds part of the purchase price in an escrow account to cover potential claims that surface after closing, such as breaches of the seller’s representations or undisclosed liabilities. The holdback commonly runs 10% to 20% of the total purchase price, and the escrow period usually lasts 12 to 24 months. Some deals release a portion at the six-month mark if no claims have been filed, with the rest released at the end. If you’re counting on the full sale price for a major purchase, plan around the possibility that the last chunk won’t arrive for a year or more.
How the IRS Taxes Your Payout
Tax treatment depends heavily on who bought your shares.
If you sold to a third-party buyer, the proceeds are taxed as a straightforward capital gain or loss based on your holding period. Long-term capital gains (shares held more than one year) are taxed at 0%, 15%, or 20% depending on your income bracket.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, the 20% rate applies to single filers with taxable income above $545,500 and married couples filing jointly above $613,700. Short-term gains on shares held a year or less are taxed as ordinary income, up to 37%. High earners face an additional 3.8% net investment income tax on capital gains when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not indexed for inflation. Combined with the 20% long-term rate, the federal rate on a large payout can reach 23.8% before state taxes.
Issuer Buybacks: The Section 302 Tests
If the company itself bought your shares, Section 302 of the Internal Revenue Code decides whether the payment is taxed as a capital gain or as a dividend at ordinary income rates.6Office of the Law Revision Counsel. 26 USC 302 – Distributions in Redemption of Stock The payment is treated as a capital gain if the redemption meets any one of three tests:
- Substantially disproportionate. Your ownership percentage after the redemption must drop below 80% of what it was before, and you must own less than 50% of the company’s total voting power afterward.6Office of the Law Revision Counsel. 26 USC 302 – Distributions in Redemption of Stock
- Complete termination. You sell every share you own in the company.
- Not essentially equivalent to a dividend. Even if you miss the mathematical thresholds above, the redemption can qualify if it produces a “meaningful reduction” in your proportionate interest. This test is fact-specific.
Fail all three and the entire payment is taxed as a dividend at ordinary income rates. That outcome hurts most when a shareholder sells a small percentage of holdings in an issuer buyback and keeps significant control.
Watch for constructive ownership. Under Section 318, the IRS attributes shares owned by your spouse, children, grandchildren, and parents to you for the Section 302 tests. If your spouse owns 10% and you own 15%, the IRS treats you as owning 25%. Family attribution has tripped up many shareholders who thought they cleared the 80% threshold on their own numbers. The complete termination test can override family attribution, but only if the departing shareholder files an agreement with the IRS waiving any interest in the company for at least 10 years.
The Section 1202 Exclusion for Qualified Small Business Stock
Shareholders who acquired their stock directly from a qualifying small domestic corporation may be able to exclude a large chunk of their gain under Section 1202. The rules changed significantly for stock acquired after July 4, 2025, when the One Big Beautiful Bill Act took effect.7Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock
For stock acquired after July 4, 2025, the exclusion phases in with holding period:
- 3 years: 50% of qualifying gain excluded
- 4 years: 75% excluded
- 5 or more years: 100% excluded
The maximum gain you can exclude per issuer is the greater of $15 million or 10 times your adjusted basis. For stock acquired on or before July 4, 2025, the older rules apply: 100% exclusion requires a five-year hold, and the per-issuer cap is $10 million.
To qualify, the corporation must have had aggregate gross assets of no more than $75 million at any point after August 10, 1993, through the time your stock was issued (the prior limit was $50 million). The company must be a domestic C corporation actively conducting a qualified trade or business, which excludes most professional service firms, banks, and real estate companies. Only noncorporate shareholders (individuals, trusts, and estates) can claim the exclusion. If you exercised stock options to acquire your shares, the holding period starts on the exercise date, not the grant date.
One Boundary: HSR Filings Are Not Your Problem
Large third-party acquisitions can trigger a mandatory antitrust filing under the Hart-Scott-Rodino Act, and buyers assembling big stakes may owe filing fees that start at $35,000 and climb into the millions.8Federal Trade Commission. Filing Fee Information The acquiring party pays. An individual employee selling shares in a company-sponsored tender offer will never encounter this requirement.