We are considering a leveraged recapitalization to take some chips off the table while keeping a majority stake. How do we structure this minority recap to ensure we do not lose control of our board seats or our corporate operating system to the incoming private equity group?

Question

Tyler Smith · Accepted Answer

A leveraged recapitalization is a powerful way to liquidity-proof your personal balance sheet while retaining upside, but private equity investors are professional negotiators who know how to take control even with a minority stake. To protect your business, you must focus on the investor rights agreement and the corporate bylaws. Do not focus solely on equity percentages. You must negotiate the board composition and protective provisions. Ensure that you retain the majority of the board seats and that the incoming investor only has observer status or a single seat. Clearly define the "supermajority vote" matters. Private equity firms will try to list dozens of operational decisions, like hiring executives, changing compensation, or signing contracts over a small dollar amount, that require their approval. You must limit these veto rights to major corporate events, such as selling the company or issuing new debt. Ensure your corporate operating system is protected by codifying your operating structure in the transaction documents. Specify that the current leadership team retains sole authority over the Accountability Chart and the operational budget. This prevents the investor from forcing their own management practices or dismantling your system. By securing operational autonomy in the legal agreements, you can use their capital to scale without losing the culture and control that made you successful.