A financial sponsor is offering a decent valuation but wants us to roll twenty percent of our equity into their new platform company. How do we evaluate this rollover equity deal structure to ensure we actually benefit from their eventual second-bite exit instead of getting diluted to zero?

Question

Tyler Smith · Accepted Answer

When a private equity buyer asks you to roll twenty percent of your proceeds into their platform, they are asking you to bet on their ability to achieve a second-bite exit. While this can yield massive gains through multiple arbitrage, it also carries significant risk if the sponsor mismanages the platform or loads it with excessive debt. To evaluate this structure, you must perform due diligence on the sponsor just as they do on you. Ask for their historical track record with previous funds and platform investments. Specifically, look at their average hold times and their realized multiples on exit. Examine the share class of the rollover equity. You want to ensure your rolled equity is on par with the sponsor's equity, rather than being subordinated to high-yielding preferred shares or complex liquidation preferences that pay the sponsor first. Negotiate for minority protections, including tag-along rights, drag-along rights, and information rights. Use your V/TO to assess if your long-term goals align with the sponsor's aggressive scaling timeline. If their plan requires gutting your company's core values to hit short-term targets, your rollover equity could lose its value. Protect your legacy and your capital by ensuring the platform's operating model is compatible with the scalable, disciplined frameworks you have built inside your own business.