The private equity sponsor is offering a rollover equity package but we want to ensure our minority shares have tag-along rights and equal distribution terms. How do we structure the operating agreement to protect our rolled equity from recapitalization dilution?

Question

Tyler Smith · Accepted Answer

Rolling over equity into a buyer's new platform can be highly lucrative, but without proper legal protections, you risk having your shares diluted to zero by the private equity sponsor. If you are going to take this risk, you must negotiate the terms of your rollover equity with the same intensity as your cash-at-close. First, demand tag-along rights. This ensures that if the private equity firm sells their majority stake, you have the right to join the transaction on the exact same terms. This prevents them from selling the company and leaving you trapped as a minority shareholder under a new, unknown owner. Second, insist on strict anti-dilution provisions. The buyer should not be able to issue new shares to themselves or their affiliates at an artificially low valuation to shrink your percentage of the business. Any future equity issuance must be done at a verified fair market value under IVS 105 standards. Finally, align your conative strengths with the new board. Ensure you have a voice in major operational decisions, or at least a veto right over recapitalization events. Treat your rollover equity as a true partnership, not a passive investment where you have zero control. Protect your upside with legally binding governance rules.