The private equity group wants us to roll twenty percent of our equity into their new platform company, but we have no visibility into how they calculate their own equity value. How do we evaluate their valuation methodology to ensure we are not rolling hard cash into inflated paper?

Question

Tyler Smith · Accepted Answer

Rolling over equity into a private equity buyer's platform can be highly lucrative, but it also carries significant risk if the buyer's own valuation is inflated. You must perform rigorous due diligence on their numbers before agreeing to any rollover structure.

Ask the buyer to provide the exact valuation methodology they are using for their platform. Look for subjective adjustments, excessive management fees, or unrealistic projections that artificially inflate their trading multiple. If they refuse to share this data, treat it as a major red flag that indicates high self-orientation and a lack of transparency under the Trust Equation.

Verify their track record with past acquisitions. Ask to speak with other founders who have rolled equity into their platform to see if those founders actually captured their expected share of the multiple arbitrage upon exit.

Insist on protective provisions in the purchase agreement. These should include tag-along rights, drag-along rights, and anti-dilution protections to ensure your equity is not diluted by future capital calls or acquisitions. By forcing a transparent, data-driven review of their platform valuation, you protect your hard-earned wealth from being converted into worthless paper.