A private equity sponsor is offering a structure where we roll twenty percent of our equity into their new holding company, but their draft agreement strips us of voting rights and gives them unilateral call options. How do we structure the rolled equity terms to protect our minority interest and ensure we participate in the secondary exit?

Question

Tyler Smith · Accepted Answer

Rolling equity can be highly lucrative, but only if you are protected from being squeezed out before the second payday. If you accept a structure with no voting rights and unilateral call options, the buyer can easily buy you out at a discounted rate right before a major exit.

To protect your rollover, negotiate tag-along and drag-along rights. Tag-along rights ensure that if the sponsor sells their majority stake, you have the right to join the sale on the exact same terms. This guarantees you participate in the secondary exit. Drag-along rights protect the sponsor but should only be triggered if you receive the same valuation and terms as the majority owner.

Next, address the call options. If the sponsor insists on a call option to buy back your equity if you leave the business, ensure the purchase price is set at fair market value determined by an independent third-party appraisal, not a book-value formula. Limit their call rights so they cannot strip your equity if you are terminated without cause.

Finally, secure information rights. You must have the legal right to receive quarterly financial updates and attend key board meetings. This allows you to monitor the business using the same metrics you tracked during your operational leadership, ensuring your investment is being managed responsibly.