The buyer is proposing a deal where seventy percent of the purchase price is paid in cash at close and thirty percent is rolled over into their new platform entity. How do we evaluate the structural risks of this rollover equity to ensure we are not left with worthless paper?

Question

Tyler Smith · Accepted Answer

Rollover equity is often promoted as a second bite of the apple, but without the right protections, that thirty percent can easily be diluted to zero. You must treat rollover equity with the same skepticism you would bring to a minority investment in an unknown company. First, analyze the share class and capital structure of the buyer's platform entity. - Ensure your rollover shares have pari passu status with the private equity sponsor's equity. If they hold preferred shares with liquidation preferences and high accrued interest, your common equity could be wiped out in a sale. - Negotiate strong tag-along and drag-along rights. This ensures you can participate in a future exit on the exact same terms as the majority owners. - Secure information rights that guarantee you receive regular financial statements and operational updates. Use your EOS lens to evaluate the buyer's operating model. Ask yourself if they have a clear, systemized framework to scale the platform. If they do not run on a structured operating system like EOS and lack automated workflows, their ability to execute is highly suspect. Do not roll over your hard-earned equity into a chaotic environment. If the buyer cannot show you a clear path to a second exit, negotiate to reduce the rollover amount and increase the cash at close.