The buyer is requiring us to roll over twenty percent of our equity into their new holding company, but we will have zero voting power or board representation. How do we ensure our rolled-over equity is not diluted to zero by future capital calls or sponsor fees?

Question

Tyler Smith · Accepted Answer

Rolling over equity without voting control is a high-risk proposition that often results in sellers getting squeezed out by professional investors. If you do not write strict protections into the new entity's operating agreement, the buyer can easily dilute your share value by issuing cheap shares to themselves during future capital calls or draining the company's cash through massive parent-company management fees. To protect your minority stake, you must negotiate clear, non-negotiable protective provisions. First, insist on strong anti-dilution provisions, specifically pre-emptive rights that give you the option to participate in any future equity rounds on the same terms as the sponsors to maintain your percentage. Second, negotiate a strict cap on sponsor fees, management fees, and overhead allocations, ensuring that these expenses are calculated as a small, fixed percentage of EBITDA rather than an arbitrary number that wipes out your distributions. Finally, demand tag-along rights, ensuring that if the majority owner sells their stake, you have the right to sell your shares on the exact same terms. Tie these terms to a shared, long-term vision. Use the V/TO format to ensure both parties are aligned on the destination of the company, making it clear that your equity roll-over is an active partnership, not a blank check for their sponsors.