What is a Tender Offer?
Demystifying the complexity of Private Company Liquidity Events
Justin: Welcome, everyone. Both Jess and I are really excited to be with you today and lead this virtual workshop on Liquidity Solutions, specifically speaking to tender offers within the private markets. A quick background on myself, I lead our global private market client success team within Morgan Stanley at Work, focusing on client covers for equity cap table administration and overseeing execution for all liquidity events. Jess, I'll hand it over to you to introduce yourself.
Jessica Young: Thanks, Justin, and hi everyone. My name is Jessica Young and I've worked with private market companies for just under a decade now. My current role is focusing on private market transactions where I run our tender offer team.
Justin: Thanks, Jess. All right. Today's Virtual Workshop is designed to provide corporate clients within the private markets with keen insights into what is a tender offer, is a tender offer right for your company, key planning considerations, and how Morgan Stanley at Work can support your liquidity events. Kicking things off, Jess, my first question is what exactly is a tender offer?
Jessica Young: Yeah, that's a great question, Justin. A tender offer at its core is a transaction that can provide liquidity to existing shareholders in a private company, either via a company buyback or leveraging external investors for the investors to buy the tendered shares directly from the participants. Private market tender offers serve as potentially great options to provide liquidity in the secondary markets as access to the public markets to sell those same shares may be ways down the road. Tender offers facilitated using Morgan Stanley at Work's Liquidity Module provide a streamlined and efficient means to achieve liquidity within the private markets.
Lastly, just as in our public market counterparts, tender offers do need to be open for 20 business days. In addition to that, tender offers can be a great tool to attract and retain talent. When a company is private and stakeholders don't typically have access to liquidity. By offering a tender offer to shareholders, companies can both alleviate pressure from early investors as well as employees who are looking to liquidate their holdings.
Justin: Thanks, Jess. That was really helpful. Tender offers can be a really great solution for private clients. And with that, I'd like to move on to our next topic of what are the advantages of running a tender offer?
Jessica Young: Justin, that's a great question. As companies continue to remain private for longer, finding liquidity solutions within the secondary market has become increasingly more important. We saw the IPO activity in 2021 reach an all-time high, and then in 2022, we started to see the market correction disrupt private company's IPO plans, meaning companies who had originally planned to be public now or at some point in 2023 are now having to reconsider how to get stakeholders access to liquidity without an IPO. So one option that they have is to run a tender offer. This can be in the form of a company buyback where the company is repurchasing the shares directly from their participants.
It can also be structured as an investor-led tender offer where the investor is actually buying the shares directly from the stakeholders. Companies get to remain in control of that process by setting eligibility parameters to participate in determining who can sell and how much they can sell. So, for example, let's say that you want to allow your current employees to sell just a portion of their equity so they can realize the value of their equity, but also want to ensure that they are still incentivized to continue to work hard and see the value of those remaining shares continue to grow. You may also want your early investors, or terminated participants, to sell all or nothing, meaning they're cleared off your cap table in preparation for an IPO or exit event. Tender offers provide flexibility and allow you to offer liquidity to your employees while continuing to have control over your cap table.
Justin: Yeah, that's great, Jess. Have you seen any recent trends that you could kind of speak to from a tender offer perspective, talking with our corporate base, that maybe could help set the stage for what's kind of happening in the market right now?
Jessica Young: Yeah, I think as we saw last year, kind of early to middle of last year, things kind of came to a standstill where we weren't seeing private, the IPO market had really slowed. We weren't seeing private companies really offering these liquidity events, I think, due to just the uncertainty and not knowing kind of what was going to happen next, and so the market just kind of paused. As we got into late Q3 or early Q4, we saw that things kind of start to pick up again.
And so, transactions were happening. I would say they were kind of smaller transactions than maybe we had seen in the past. But even though the size of the transactions tended to be smaller, we saw participation rates increase. We saw transactions becoming oversubscribed whereas prior - in prior years, we just weren't seeing that.
Justin: No, that's great. So now that we have a base understanding of what a tender offer is, let's shift focus to understanding if a tender offer is right for a private company. So from here, Jess, can you provide us a couple of points on why a tender offer might be the right decision depending on where a private company is in their planning cycle?
Jessica Young: Yeah, I think that's a great question. There's a lot of decisions that go into determining if a tender offer is going to be the right transaction type for your company. A couple of key considerations that we would like to bring forward are, first, is this transaction really going to help engage and retain your talent? Second, can a tender offer serve as an opportunity to bring additional investors that were maybe not able to participate in your primary funding round to the table and allow them to purchase those shares directly from your participants?
I'm going to cover this in another segment, but there has also been a rise in secondary markets where stakeholders can work to sell their holdings directly away from a company-controlled tender offer. This can add complexity to a company trying to control their cap table. And so that's just something to keep in mind. A few other considerations could be if your company board is pushing for a stock repurchase program. You can absolutely facilitate this via a tender offer.
Justin: Yeah, that's helpful. One or a couple of things that may help set the stage for what we're seeing from a transactional basis is can you give us a little bit of an indication of what we're starting to see in the market with late-stage companies staying private longer? What are some transactional trends that you've been seeing?
Jessica Young: Yeah, I think companies decided years ago that they were going to issue double-trigger RSUs while they're a private company, meaning they cannot release those shares until an IPO or an exit event happens. Where that comes into play with a tender offer is, those shares are not going to be released because you haven't gone through that public offering yet and therefore they are not eligible to sell in a tender offer. And so, we're speaking with companies who maybe already thought that they were going to be public or they planned on being public sooner than maybe they will now. And that is having a downstream impact on being able to set the eligibility parameters and run a successful tender offer for the vast majority of their participants.
If you have those double-trigger RSUs in place, what are your options? And at Morgan Stanley at Work, we have really had to deal with kind of clients on the full spectrum of their award types and what options do they really have in order to be able to provide liquidity to more participants than just maybe their early option holders? And so I would say that's the number one kind of conversation that I'm having right now, is what can we do to help those companies come up with a plan now that they don't know necessarily when they're going to be able to go public?
Justin: Yeah, I agree. I think complexity has continued to grow and it's keen insights, for sure, on what we're seeing in the market. So with that kind of having the foundation in place to define what a tender offer is, coupled with the advantages in determining if it's the right time to facilitate this type of transaction, I would also like to know what private companies can do ahead of time to ensure they are prepared for one of these transactions. If you can kind of walk us through that, if you don't mind?
Jessica Young: Yeah, yeah, definitely. I mean, being prepared is going to be very important. Tender offer preparedness can be very similar to preparing to run any type of transaction, whether it's an individual selling in a secondary market to an IPO, or anything in between. As was discussed in a prior workshop, the transaction readiness workshop, which I absolutely think everybody attending this session should go and watch, we believe there are really four pillars to being transaction-ready, the first of which is data integrity. When running any transaction, making sure data inputs are accurate, both in a company's cap table and within those supporting systems can be super important.
For companies, this may be the first time that there's actually money moving as part of a transaction, and you really want to be sure that it's accurate before settlement happens. Ensuring that your cap table is up to date is going to be a vital process in this. Information such as demographics becomes necessary pieces of information. You're going to have a large population of people entering the system all at once and you want to ensure that it's smooth for them. And if there are key pieces of demographic data missing from their profile, that process may become more difficult. And at a time when people are really excited, you really don't want something like that to kind of bring down their experience.
Justin: Yeah, I agree. I think transaction readiness is really a great point to reference because going into a tender offer, there are a lot of conditions that need to be said ahead of time. And maybe you could kind of speak to what are some things and trends that you've seen that have really helped private clients go into a transaction on a smooth path. Meaning they were able to kind of take these action steps ahead of time.
Jessica Young: Yeah, I mean, you make a great point. There's plenty of things that you can do ahead of time to ensure that this process is smooth once the transaction really gets going because internally you're going to be moving 100 miles an hour trying to prepare. And so having the kind of second pillar here would be the systems and process infrastructure. Imagine you're now planning on running a large-scale transaction, you really want to be sure that you have the correct systems in place and processes already set to be able to scale and be successful.
The question is, do you have an equity management system in place that has the ability to run these types of transactions once the system is in place? Have you really thought through the need to calculate taxes for potentially hundreds, maybe even thousands of sales? It's not something you really had to do before. Maybe you've had an option exercise here or there, or maybe you are planning for a future RSU release that's going to happen post-IPO. You now have the time to get the systems in place to ensure that you're ready to go. As soon as somebody from your board or your C-suite decides that we're going to pivot and run this type of transaction. You may want to consider integrating your cap table management provider with your payroll and HRIS systems.
In addition to systems, you may also depend on resources from additional teams to help ensure that a transaction of this size can be effective. You may also want to meet with key stakeholders from outside teams such as HR, legal, tax, payroll, etc. All of those teams are going to be important to a successful transaction so the sooner and the earlier in the process you can start building those relationships, the smoother you hope that it can be down the road.
The third pillar is global compliance readiness. Do you have global stakeholders? If that's the case, you want to be sure that you have mobility policies in place. This is another area where Morgan Stanley at Work can step in and help provide guidance.
And lastly, participant engagement. A company puts so much time and so many resources into running an equity plan and offering liquidity to their stakeholders. It is important that your participants understand what it is they have and what it now means to be able to participate in a tender offer. Ensuring that your participants have a foundational understanding of their equity prior to a transaction that offers them liquidity helps build awareness ahead of a tender offer. Emotions can definitely be running high when participants gain access to liquidity for the first time from their equity holdings in their career at a company.
Private companies can help their stakeholders by ensuring that they are equipped to make the right financial choices for themselves during this time. This can start with helping them gain an understanding of their equity and what it would mean for them to sell now. Educating your participants prior to this event on the basics and offering access to financial guidance and planning is not only a value add for your participants, but we all also know now that participants believe that their employer should be offering this benefit.
Justin: All right, Jess. What I would now like to dive into is when a tender offer may not be the right transaction for a private company. Could you walk us through other options that could still provide liquidity to private company stakeholders?
Jessica Young: Yeah, I mean, a tender offer may not be right for your company, and there are other options to provide stakeholders liquidity while still remaining private. You could consider allowing your stakeholders to sell in the secondary market as an alternative. Understanding that, as a company, you most likely want to keep control around your cap table, and now more than ever, there are more platforms that can help directly support private market secondary transactions. Another alternative would be option lending. We're not going to cover that in today's session but it is out there if that's something you want to consider.
Justin: Great. We are now moving on to the final segment of today's workshop, and with that, we now want to help you better understand how Morgan Stanley at Work can help facilitate running tender offers for private clients. Jess, I'd like to hand it back to you. If you can run us through how Morgan Stanley at Work partners directly with private clients to facilitate the planning, execution, and settlement of a tender offer?
Jessica Young: Yeah, absolutely. Conducting a shareholder liquidity event can be complex and a challenging undertaking. The Shareworks platform can help make that process easier through an intuitive experience that automates the setup and management of your tender offer while you receive personalized support from a team of experienced specialists. We do the heavy lifting so you can focus on running your business. Running tender offers within Shareworks helps ensure that your equity plan data remains accurate and all in one place while providing your employees with the same familiar and easy-to-use experience.
Starting with pre-launch, we can configure the platform to execute a tender offer based on your specific requirements. This can be anything from messaging to your participants, going back to shareholder eligibility, we can set different minimum and maximum parameters, your available legal documents can be accepted and signed through the platform, as well as any timing that you may have.
Next, we can set up a testing environment and work with your various stakeholders; again, circling back to those stakeholders and legal, finance, HR, and equity, to obtain their feedback and ensure all necessary documents are properly uploaded. Lastly, prior to launch, to maximize participation, we can provide participant education, expertise, and support, conducting a live demo or hosting a financial education session with a Morgan Stanley at Work representative to help your employees understand how the tender offer may impact them financially.
And now we get to launch. Once the tender offer is live, participants can review the offer via the Shareworks platform, sell their shares and fill out any necessary paperwork. The platform is customized to your offer, keeping the offer open for as many days as your company stipulates. And as mentioned before, typically, that's going to be 20 business days. But again, we can be flexible as you need. Participants can view the tender offer in one seamless experience. It's an easy-to-follow step-by-step process that shareholders can review all of their documents, view their current holdings, determine sale quantities, get a summary of exercise costs and estimated gross proceeds, and then finally, consent and sign off on the sale.
Post-event, proceeds are delivered to whichever Shareworks platform-connected account that they choose. Shareholders will also have access to a dedicated support team should they have any questions or need assistance. Plan administrators can access real-time reporting in order to track all participant activity on the platform and throughout the election window. The Morgan Stanley at Work Equity Solutions Team supports you throughout the tender offer with periodic check-in calls or program updates.
And now we get to post the transaction. Settlement is automated through the platform so your cap table gets updated on the same day and you don't have to worry about manually uploading any sort of transactions as the platform just does it for you. And then lastly, a settlement. So we're able to go ahead and settle the transaction, move that money into the account of your participants' choosing. Your tax and legal teams also get to receive executed documentation and a breakdown of proceeds, fees, and any withholdings.
Justin: Those are really great points, Jess. Going back to the planning phase, I found that really interested in understanding more about what is that interaction like with the private client and our Morgan Stanley at Work team. Maybe you could walk through that a little bit more in-depth on that initial planning phase.
Jessica Young: Yeah, absolutely. We've got a team of transaction specialists that really, their whole role is to focus on private market liquidity events. And so over the last few years, they've really built up an expertise on these specific transactions and kind of the ins and outs and complexities that come along with them. And so I'd say the really important part is kind of the pre-planning phase when we're working specifically with the company administrators, but also their legal counsels both internally and externally.
I'd say we really want to work with the company to ensure that all of the documentation flows well within the platform. And so I think we spend a lot of time on those documents and ensuring that the participants are going to fully understand what the offer is here through the legal documents that come along with this. So I think that tends to be something that is really important once we kind of kick things off and get into that planning phase.
The second piece of that is going to be eligibility. We really want to make sure that eligibility and those parameters meet your needs. Ideally, are you hoping to allow for participants to just get a little bit of liquidity? Do you want people off your cap table? You let us know what your ideal outcome is and we can help you kind of back into those numbers.
Justin: Yeah, I think part two to my question here would be could you give us a little bit more insight into what it means to have a fully integrated platform from getting the data into Shareworks from the private client to actually facilitating the transaction? What does that look like once you settle the tender offer and now you're reflecting what has actually happened as part of the transaction? Maybe you get a little bit of insight there.
Jessica Young: Yeah, I mean, the great thing at using the Shareworks platform for this transaction is we have your cap table data on Shareworks, we have your participant data on Shareworks, and therefore we kind of eliminate the need to export data off-platform, import into another platform, run the transaction, hope that everything was correct.
The Shareworks platform and the people that are working on these transactions, they know what to look for and the system knows if this was shares that were early exercise but they haven't actually hit that time vesting, don't allow them to sell it. If you did that off-platform then you don't have that kind of check in place to tell you this shouldn't be eligible. And so by having this all in one place you're really kind of eliminating that human error as well. And that's as we get to the launching of the transaction.
When we get to settling the transaction, again, updating the cap table takes time, it takes resources. Whether you want to do that internally or you want the Shareworks team to help you do that, it's going to take time. And so we've eliminated that by automating that process. We click a few buttons and the exercises are completed, balance certificates are created, and we're able to cancel the repurchase shares as needed. So when you need to provide your updated cap table, you can do that on the day of settlement.
Justin: Well, those are really great points, Jess. And I think in summary, hopefully, today's virtual workshop really helps sets the stage for what we can offer from a Morgan Stanley at Work solution basis when facilitating tender offers. So really appreciate your time and thank you for joining us today.
Jessica Young: Thanks, everyone.
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