The buyer wants us to roll over fifteen percent of our equity into their new holding company, but they have a complex capital stack with multiple layers of debt. How do we structure our rollover equity to ensure we are not wiped out by their leverage in a downside scenario?

Question

Tyler Smith · Accepted Answer

Rollover equity can be a powerful tool to capture a second bite of the apple, but if the buyer's capital structure is highly leveraged, your minority shares are at risk. In a downside scenario, senior lenders and preferred equity holders are paid first, which can easily wipe out common equity holders.

To protect your rollover equity, you must negotiate its position in the capital stack. Insist that your rolled-over shares are structured as preferred equity with a liquidation preference, rather than common stock. This ensures that you are paid back before the buyer's common equity holders in the event of a sale or liquidation.

Additionally, negotiate protective covenants and veto rights over major corporate actions. You should have a say in any decisions to take on additional debt, sell major assets, or issue new classes of equity that could dilute your position.

Finally, secure a clear path to liquidity. Negotiate a put option that allows you to force the holding company to redeem your shares at a fair market value after a specified period, such as five years. This prevents you from being locked into an illiquid minority position indefinitely. Never accept rollover equity blindly; run the numbers and structure it defensively to protect your hard-earned wealth.