Tender Offer for Startup Shares: The Tax Questions Kestrel Bay Retirement Advisors Asks Before You Accept

Wrong lot, no withholding: two errors worth $54,000 and a penalty

When a tender caps how many shares you can sell, people often pick shares without checking exercise dates. Tendering a lot exercised 10 months ago instead of one exercised 18 months ago turns long-term gain into ordinary income. In the hypothetical example later on this page, that one choice adds $54,000 of tax.

The second error usually arrives with the first. Sellers assume the company withheld tax, the way it does on an RSU sale. Ordinary income from a disqualifying ISO sale does show up on your W-2, but no federal income tax withholding is required, and no Social Security or Medicare tax applies. The check arrives whole, and the full bill ($126,000 in the example) can land in April with an underpayment penalty added.

Put together, that is $54,000 of avoidable tax, plus penalty interest on $126,000 that nobody paid in during the year. The penalty rate changes, so check the current IRS rate. The better way is short: list every lot with its grant and exercise dates before electing, then send an estimated payment the same quarter the cash arrives.

How much of a tender offer for startup shares is taxed as ordinary income?

It depends on the share type, and sometimes on the lot. For qualifying ISO shares, the whole gain over your strike price is long-term capital gain. For disqualifying ISO shares, the spread at exercise (limited to your actual gain) is ordinary compensation income. Any gain above the exercise-date value is capital gain, and it's short-term if you held the shares one year or less after exercise.

NSO shares you exercised earlier and held were already taxed on the spread at exercise. Only the difference between the tender price and the exercise-date value is taxed now, at long-term rates after more than one year. A same-day NSO exercise inside the tender is different: the whole spread becomes wage income, with withholding and payroll tax.

If you exercised early and filed an 83(b) election, your basis is the value on the election date and all later gain is capital gain, long-term after more than one year. Qualified small business stock can change this too, but it has its own page and we leave it there.

One more question deserves an email to the company. If it, or a buyer acting for it, pays more than fair market value (say, above the latest 409A value), the IRS can treat the excess as compensation, taxed like wages. Capital gain treatment then covers only the part up to fair market value. Ask how the premium is reported before you elect, and keep the reply with your Form 3921.

Ten months versus 18 months: the lot that sets the bill

Gwen and Sam (hypothetical), 52 and 53, live on two very different incomes. She is a VP of sales at a software company that would go public two years later, and he teaches high school and will have a state pension. Her company ran an employee tender at $40 a share, capped at 10,000 shares per person. Gwen held two ISO lots of 10,000 shares each from a four-year-old grant with a $4 strike. Lot A was exercised 18 months earlier. Lot B was exercised 10 months earlier, when the shares were valued at $30.

Lot A is a qualifying sale: ($40 − $4) × 10,000 = $360,000 of long-term gain, or $72,000 at an illustrative 20%. Lot B would be disqualifying: ($30 − $4) × 10,000 = $260,000 of ordinary income, plus ($40 − $30) × 10,000 = $100,000 of short-term gain. That is $360,000 taxed at an illustrative 35%, or $126,000. Tendering Lot A saves $126,000 − $72,000 = $54,000 (ignoring AMT and state tax).

Why does the deadline matter? Lot B turns qualifying about two months after the tender closes, and the date that counts is the sale date at closing, not the day Gwen submits her election. Before Kestrel Bay Retirement Advisors suggests which lots to tender, it prices the tax on each lot and notes which tax year it lands in. The lot with the lowest tax per dollar of proceeds fills the cap first.

Yes, keeping Lot B means holding an illiquid share that may never get another tender at $40.

Six documents to pull before the election window closes

Start with the Form 3921 and grant agreement rows, because those two decide whether a lot qualifies, and they often sit in different places. Form 3921 arrives by January 31 after each year you exercise ISOs. If you exercised in several years you'll have several forms, and each lot's exercise-date value is on its own form.

The equity portal shows grant dates but sometimes labels ISOs above the $100,000 first-exercisable limit as NSOs. Check the type on each lot, not just the grant. Last year's tax return gives you the prior-year total tax for the estimated-tax safe harbor discussed below.

How long is the tender window, and what dates follow it?

A liquidity program structured as a tender offer must stay open at least 20 business days under SEC Rule 14e-1, and that window is usually your entire decision time. The offer documents arrive first. Then the election window opens and closes. Check each lot's holding-period anniversaries against the expected closing date, because closing and payment often come weeks after the window shuts.

The next quarterly estimated-tax date follows (April 15, June 15, September 15 or January 15). December 31 decides which tax year the income lands in. In January the W-2, Form 1099-B and any Form 3921 arrive, and the return is due April 15.

If the cash arrives before a quarterly date, pay the estimate that quarter. Waiting until April triggers the penalty described at the top of this page only if your withholding and earlier estimates fall short of the safe harbor: 100% of last year's total tax, or 110% if last year's AGI was over $150,000. Tender income usually blows past that cushion, so we size the payment to the lot actually sold.

One fixed price, no IPO upside: the tender trade-off

What you gain is cash at a known price from a share you otherwise can't sell. That cash can pay exercise costs or taxes on other lots, and it reduces how much of your wealth rides on a single private employer. What you give up is any rise if the company later goes public at a higher price, and you may have to accept a price set below what late-stage investors paid. A private share can also fall, sometimes below what you paid to exercise or below the tender price you turned down.

We'd usually tender at least part of the cap when company stock is most of your net worth, because a private share can't be sold on a bad day at all. How much concentration is too much is a separate question with its own page.

Some people should pass. If every eligible share is weeks from qualifying and the company has a written schedule of regular tenders, waiting can be worth it. Without that schedule, there's no guarantee of a next round.

Choosing lots only helps if you hold more than one lot and the cap forces a choice. If every share you own is under a year from exercise, timing is your only lever. This page also leaves out state tax, AMT credit carryforwards and QSBS, each of which can change the result.

What age or income level changes the tender math?

Holding periods set the first line: more than two years from grant and more than one year from exercise for ISO qualifying treatment, and more than one year from exercise or the 83(b) date for long-term gain on other shares. Income sets the second. If last year's adjusted gross income was over $150,000, estimated payments plus withholding must reach 110% of last year's total tax to avoid an underpayment penalty, whatever the tender adds.

Payroll tax depends on the type. NSO tender income is wages, but Social Security tax stops at the $184,500 wage base (2026), so an earner already above it pays only Medicare tax on the extra. ISO disqualifying income has no payroll tax at all.

Age matters from about 63. Income in that year sets Medicare premiums two years later, and for 2026 premiums, joint MAGI above $218,000 raises Part B from $202.90 to $284.10 a month per person. The IRMAA page covers that in detail.

• Decision rule: if the tender caps how many shares you can sell, fill the cap first with ISO shares that already meet both holding periods, and tender a disqualifying lot only after those run out.

Kestrel Bay Retirement Advisors prices each lot before you elect

Send the tender's closing date through the request form along with your grant agreements and Forms 3921. Kestrel Bay Retirement Advisors will map your lots and show the tax on each before the window shuts. We go over the fee when we first speak and put it in writing before any work begins. Nobody can promise how a tender will turn out.