The private equity sponsor is requiring us to roll over twenty-five percent of our proceeds into their new platform holding company, but we have zero control over how they run it. How do we evaluate their platform operational efficiency and structure our governance rights to protect this second bite of the apple?

Question

Tyler Smith · Accepted Answer

Rollover equity can yield a lucrative second bite of the apple, but it is only valuable if the buying sponsor actually knows how to run a platform company. If they have poor operational discipline and clash with your leadership team, your rolled-over equity could easily become worthless.

Before you agree to the terms, conduct your own due diligence on the sponsor's operational track record. Ask to speak with other founders who have rolled equity with them. Evaluate how their operating team functions. To assess the cultural and problem-solving alignment between their executives and your leadership team, suggest using conative assessments like Kolbe Index profiles. This helps identify if their team has the strive and follow-through instincts to execute their growth strategy or if they will get bogged down in bureaucratic micromanagement.

On the legal side, you must negotiate critical minority governance rights. Ensure you have drag-along and tag-along rights, which guarantee that you can sell your rollover equity on the same terms and at the same time as the majority owners. Secure information rights that guarantee regular access to financial statements and key performance indicators. Do not treat rollover equity as play money. Treat it as a direct investment in a new entity, and ensure you have the transparency and protections needed to safeguard your capital.