The buyer is offering a deal structure that requires us to roll over twenty percent of our equity into their new holding company. How do we evaluate the true value of this rolled equity, and what operational governance rights should we demand to ensure our minority stake is not diluted or ignored?

Question

Tyler Smith · Accepted Answer

An equity rollover is often presented as a way for you to get a second bite of the apple when the buyer eventually sells the combined entity. However, rollover equity is highly illiquid and comes with significant risk. To evaluate its true value, you must scrutinize the capital structure of the buyer's holding company to understand where your shares sit in the liquidation preference hierarchy.

You must negotiate strong governance and minority protection rights to protect your rolled equity. Demand a seat on the board of directors or at least observer rights so you remain informed of strategic decisions. Ensure your legal agreement includes tag-along rights, drag-along rights, and anti-dilution protections to prevent the buyer from issuing new shares that wipe out your ownership percentage.

Operationally, you should also negotiate for the holding company to adopt a consistent management system. If they run their portfolio companies on EOS®, you will have much better visibility into their financial and operational health. Having access to their weekly high-level Scorecard metrics and V/TO® ensures you are not left in the dark about the performance of your rolled investment.