The buyer is proposing a deal where we roll twenty percent of our equity into their new holding company, but we will have zero control over their future exit timeline. How do we evaluate this rollover equity so we do not end up with worthless paper?

Question

Tyler Smith · Accepted Answer

Rollover equity can be a powerful wealth-creation tool, but without the right protections, you risk trading hard-earned business value for illiquid, subordinate shares that can be easily diluted. You must evaluate rollover equity with the same rigor as the cash portion of the deal.

First, understand your position in the capital stack. Ensure your rolled equity is structured pari passu, meaning on equal terms, with the buyer's equity. If the buyer has preferred shares with liquidation preferences, your common rollover equity could be wiped out in a mediocre exit. You must negotiate provisions that protect you from being diluted in future funding rounds.

Second, evaluate the buyer's operational capability. Review their V/TO® and strategic plan for the combined entity. If they do not have a clear operating system to drive growth, your equity may not appreciate. Ask yourself if you trust their leadership team to run the business effectively.

Third, secure key governance rights. While you will not have operational control, negotiate tag-along rights, which allow you to join any future sale on the same terms, and drag-along protections. You should also secure clear information rights, ensuring you receive quarterly financial statements so you can track the performance of your investment. Treat rollover equity as a new investment, not just a deal-closing mechanism.