The private equity buyer wants us to roll over fifteen percent of our equity into their new platform, but their draft operating agreement includes drag-along rights that would force us to sell our rollover in their next transaction at any valuation they accept. How do we protect our minority rollover position?

Question

Tyler Smith · Accepted Answer

Rollover equity is often promoted as a second bite of the apple, but without proper governance protections, it is easily reduced to zero. Drag-along rights allow the majority owner, usually the private equity sponsor, to force minority shareholders to participate in a future sale on the same terms as the majority. While standard, this clause can wipe you out if the buyer structures a future exit where the senior debt and preferred equity holders are paid in full, but the common rollover equity receives nothing. To protect your rollover, you must negotiate specific limitations on these drag-along rights. First, demand a minimum valuation floor. This clause states that the drag-along right cannot be exercised unless the sale price yields a minimum specified return on your rollover equity, protecting you from a fire sale. Second, negotiate a tag-along right, which ensures that if the private equity firm sells any portion of their shares, you have the right to sell your proportional share on the exact same terms. Third, demand protective veto rights over major corporate actions that could dilute your position or alter your rights. This includes the issuance of new classes of senior equity or taking on excessive leverage without minority approval. Bring these governance terms to your leadership team during your strategic planning sessions to evaluate if the rollover is a genuine wealth-creation vehicle or simply a tool for the buyer to reduce their cash-at-close requirement.