Tender offers have become a common way for founders and early employees to access liquidity before an IPO or acquisition. But if you hold Qualified Small Business Stock (QSBS), a tender offer raises an important question:
Does selling shares in a tender offer qualify for QSBS under Section 1202, and is it always the best move?
In many cases, a tender offer can qualify for QSBS treatment. In others, it can result in unnecessary taxes, lost future upside, or missed planning opportunities. This guide explains how QSBS applies to tender offers, common mistakes we see founders make, and alternative ways to access liquidity without triggering tax or disrupting QSBS planning.
This article is for educational purposes only and does not constitute tax or legal advice. QSBS outcomes are highly fact-specific.
What Is a Tender Offer?
A tender offer is a company-facilitated, structured secondary liquidity event in which shareholders are offered the opportunity to sell some or all of their shares, typically to an external investor or group of investors, at a fixed price within a defined window.
Tender offers are different from:
- An acquisition, where the entire company is sold
- An IPO, where shares become publicly tradable
- A company redemption, where the company repurchases shares directly
Founders typically consider tender offers to diversify risk, fund personal goals, pay taxes, or achieve partial liquidity without waiting for a full exit. Many of our founders use this to buy a house free of debt or put cash in the bank, allowing them to focus on the full-time role of running a company, rather than their personal finances.
QSBS Refresher: Section 1202 in 90 Seconds
QSBS allows eligible shareholders to exclude a portion, and in some cases all, of their capital gains from federal tax when they sell qualifying stock.
To qualify, the shares generally must:
- Be issued by a U.S. C-corporation
- Be acquired at original issuance
- Be issued when the company met the applicable gross asset test (generally $50M for stock issued/acquired on or before July 4, 2025, and $75M for stock acquired after July 4, 2025)
- Meet the applicable holding period requirement (generally 5+ years for stock issued/acquired on or before July 4, 2025; for stock acquired after July 4, 2025, partial exclusions may apply at 3 and 4 years, with 100% at 5+ years
- Be issued by a company engaged in a qualified active business
If these requirements are met, Section 1202 can allow founders to exclude up to the greater of the applicable statutory dollar cap or a multiple of basis, depending on when the stock was acquired.
Does a Tender Offer Qualify for QSBS?
Often yes, but not automatically.
A sale of QSBS in a tender offer is generally treated as a sale of stock for federal tax purposes. If the shares sold are QSBS and the holding period requirement is satisfied at the time of sale, the gain may be eligible for QSBS exclusion.
QSBS eligibility is determined on a share-by-share basis, and the details matter.
QSBS Tender Offer Checklist
Before assuming QSBS treatment applies, confirm:
- The shares being sold are actually QSBS
- The QSBS holding period has been met as of the tender closing date
- You are selling stock you own, not exercising and immediately selling (this can be done, but it’s much less tax efficient). And confirm whether any tacking rules apply in your fact pattern. (for example, certain nonrecognition exchanges/conversions).
- The transaction is a sale to a third party rather than a problematic redemption
- There have been no disqualifying events that taint eligibility
Partial Sales: What Happens If You Sell Only Some Shares?
Tender offers often involve partial liquidity, in which a founder sells only a portion of their holdings.
Key considerations:
- QSBS eligibility applies only to the shares sold
- Shares you retain generally keep their original QSBS status, assuming no later disqualifying redemption or other tainting event
- Basis and holding periods must be tracked carefully by lot
- Selling early can permanently use QSBS exclusion capacity
This is where modeling different liquidity paths becomes critical.
Tax Outcomes in a Tender Offer: The Three Scenarios Founders Face
| Scenario 1: QSBS and Holding Period Met | Scenario 2: QSBS but Holding Period Not Met | Scenario 3: Not QSBS |
|---|---|---|
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Common QSBS Tender Offer Mistakes
Tender offers move fast, but QSBS eligibility depends on details that require careful attention. These are the errors we see most often.
| Mistake | Why It Matters |
|---|---|
| Exercising Too Late | Exercising options shortly before a tender offer often means the holding period on the stock has not been satisfied, eliminating QSBS eligibility for those shares. |
| Assuming Startup Stock Automatically Qualifies | QSBS eligibility depends on original issuance, asset tests, and business activity. Many founders assume qualification without verification. |
| Poor Share and Lot Tracking | Multiple grants, exercises, conversions, and elections create complexity. Inadequate records can jeopardize QSBS claims years later. |
| Ignoring State Tax Exposure | Some states do not conform to federal QSBS rules. A tender offer creates a current tax event that may be fully taxable at the state level. |
| Lack of Documentation | QSBS issues are frequently lost due to missing documentation rather than incorrect facts. |
| Not Evaluating Other Liquidity Solutions | One of the most common and costly mistakes is assuming a tender offer is the only available liquidity option. Many founders participate in tender offers without evaluating alternative structures that could provide liquidity with better tax outcomes and preserved upside. |
Planning Opportunities Before You Accept a Tender Offer
Founders often treat tender offers as binary decisions when they’re actually highly customizable. The key variables, such as how much to sell, when to sell, and how to structure ownership, are all within your control.
| Planning Opportunity | Why It Matters |
|---|---|
| Selling Enough for Liquidity, Not Regret | Many founders benefit from modeling how much to sell now versus how much to retain, balancing diversification with long-term value creation. |
| Coordinating Timing With QSBS Milestones | Crossing a QSBS holding period threshold can materially change after-tax results. In some cases, waiting months rather than years can significantly improve outcomes. |
| Advanced QSBS Planning | For eligible founders, QSBS planning may involve multiple taxpayers and multiple liquidity events. These strategies must be implemented before liquidity occurs. They can also involve exploring other liquidity paths that may be more beneficial based on a founder’s circumstances. |
Structured Secondary Liquidity Solutions (An Alternative to Tender Offers)
Not all pre-IPO liquidity requires selling shares.
Structured secondary liquidity solutions allow founders and early employees to access cash without triggering a taxable sale, while retaining ownership, preserving QSBS holding periods, and maintaining upside exposure.
How These Structures Work
Under these arrangements, a third party provides cash today in exchange for an economic interest tied to some or all of your shares, without an outright sale of stock.
Common characteristics:
- Shares are not sold
- Legal ownership is retained
- Depending on structure, these arrangements may be treated as non-taxable at inception, but the tax analysis is highly fact-specific and requires careful drafting to avoid sale or constructive sale treatment.
- In some structures, the goal is to avoid a taxable sale so the QSBS holding period timeline is continued, but specific terms can create sale, constructive sale, or other adverse tax consequences, so again, drafting and structure are very important
- Upside participation remains if company value increases
- The arrangements are non-recourse, meaning repayment is tied solely to the stock outcome
When structured correctly, these solutions can preserve QSBS eligibility for a future IPO or acquisition.
Uses Beyond Simple Liquidity
Structured secondary liquidity solutions are often used for:
- Exercising stock options
- Funding tax liabilities related to option exercise
- Managing concentration risk without selling shares
- Bridging liquidity while waiting for QSBS eligibility milestones
- Avoiding premature use of QSBS exclusion capacity
In many cases, the after-tax outcome can outperform a tender offer, particularly when long-term appreciation is expected.
Tender Offer vs Structured Secondary Liquidity: A Comparison
| Tender Offer | Structured Secondary Liquidity |
|---|---|
| Shares sold | Shares not sold |
| Immediate taxable event | May be non-taxable at inception in some structures (must be analyzed and drafted carefully) |
| QSBS exclusion used now | QSBS preserved for later |
| No upside on sold shares | Continued upside participation |
| Fixed price today | Liquidity plus optionality |
| No recourse risk | Typically non-recourse to the founder beyond the shares (varies by structure) |
When This Approach May Not Be Appropriate
These solutions are not universally suitable. Considerations include:
- Structural and documentation complexity
- Counterparty risk
- Economic trade-offs
- Company approval requirements
- Eligibility limitations based on share type or company policies
They should be evaluated alongside, not instead of, a traditional tender offer analysis.
QSBS Caution: Structure Matters
Not all liquidity-without-sale arrangements receive the same tax treatment. Poorly structured transactions can be recharacterized as taxable sales and may jeopardize QSBS eligibility.
Advance planning and coordination with experienced tax counsel are essential.
What to Gather Before You Commit to Any Liquidity Event
Founders should assemble:
- Stock grant and issuance details
- Exercise records and elections
- Cap table and financing history
- Evidence of gross assets at issuance
- Business activity documentation
- Tender or liquidity structure terms
Frequently Asked Questions
Does a tender offer disqualify my remaining shares from QSBS?
Generally no, but each share must be evaluated independently.
Can I use QSBS across multiple liquidity events?
Potentially, subject to caps and eligibility.
Do QSBS gains from tender offers trigger AMT or NIIT?
It depends on acquisition date and exclusion percentage. Historically, partial exclusions (50% or 75%) can have different rate and AMT preference dynamics than 100% exclusion QSBS, and NIIT generally applies to taxable net investment income rather than excluded gain
Is a company repurchase treated the same as a tender offer?
Not always. Issuer redemptions can trigger §1202(c)(3) anti-churning rules that may disqualify stock from QSBS treatment depending on timing, parties, and amounts repurchased.
Can structured secondary liquidity affect QSBS?
Yes, which is why structure and documentation are critical.
Bottom Line
- A tender offer can qualify for QSBS, but details matter
- Partial liquidity does not automatically disqualify remaining shares
- Structured secondary liquidity solutions can provide cash without tax
- Evaluating multiple paths often produces better outcomes than defaulting to a tender offer
Before accepting a tender offer, founders should model selling, waiting, and structured liquidity through the lens of QSBS, taxes, and long-term upside.
Evaluating a Tender Offer? Model It First.
For venture-backed founders expecting a $20 million-plus personal exit, Keystone Global Partners can help model tender offers, secondary sales, and alternative liquidity strategies so you can choose the option that maximizes after-tax outcomes and long-term value.
Schedule a call with our founder
Disclaimer: This information is for educational purposes only and does not constitute legal or tax advice. Consult qualified tax and legal professionals regarding your specific situation.
