Tender Offers Undervalue Employee Shares

The pricing gap shows that private liquidity was not one market, it was two. Founders and investors could usually wait for one off sales or negotiate from a position of strength, while employees were funneled into company run tenders that were commonly pegged to stale round prices. In the 64 tender offers studied, underpricing cut both ways, employees sold less often, and when they did sell, they cleared at worse prices than other holders.

• Tender offers were usually priced at or below the last round, with 83% of transactions at 1.0x or lower. That works for the buyer, but it misses the value created between rounds, which is exactly where fast growing companies often compound the most.
  1 sacra
• Employees were also late to liquidity. Investor sales made up about 50% of secondary transactions overall, versus 33% for employees, and 75% of employee transactions did not happen until companies were above $160M post money. By then the stock was less exclusive and usually commanded less premium.
  1 sacra
• The structure of tenders helps explain the discount. They are issuer controlled, often tied to a recent primary price, and involve significant company control over timing and terms. More recurring, market driven programs were emerging as a way to reduce the one shot pressure that pushes employees either to hold everything or sell low.
  2 sacra 3 sacra

The market was heading toward more frequent, more price discovery driven liquidity windows. As private companies stay private longer, the winners will be the ones that make employee stock feel less like a lottery ticket and more like a real part of compensation, with regular chances to sell and a price set by current demand rather than the last financing round.