The buyer wants us to roll over twenty percent of our equity into their new platform holding company but refuses to give us a seat on the board or veto rights over future recapitalizations. How do we protect our rolled equity from being wiped out by future debt or dilutive shares?

Question

Tyler Smith · Accepted Answer

A rollover is often pitched as a second bite of the apple, but without structural protections, it can easily be diluted to zero. If you do not have board representation or protective covenants, the private equity sponsor can load the holding company with debt or issue preferred shares that sit senior to your common equity.

You must negotiate class rights and protective provisions for your rolled equity. Demand that your shares are issued pari passu, meaning on equal footing, with the buyer's equity class. This ensures you receive the same distributions and are treated equally in any future liquidation or sale.

Furthermore, negotiate explicit veto rights over key corporate actions. These should include the issuance of any debt that exceeds a specific leverage multiple, the creation of any senior equity classes, or any transactions with affiliates that could drain cash from the holding company.

Use your V/TO to clarify your long-term alignment with the platform. If you do not have a seat on the board, insist on observer rights so you can monitor key strategic decisions. If the buyer refuses these terms, you should reduce your rollover percentage or increase the cash component of the purchase price to minimize your exposure to their capital structure.