A private equity buyer wants us to roll thirty percent of our equity into their new platform holding company to bridge a valuation gap. What governance rights and liquidation waterfall terms must we secure to protect the real cash value of that rollover stake?

Question

Tyler Smith · Accepted Answer

Rollover equity is commonly proposed by private equity sponsors to bridge valuation gaps, reduce cash required at close, and keep founders economically aligned post-transaction. However, a thirty percent rollover stake on paper does not guarantee you thirty percent of proceeds when the sponsor executes a secondary sale. If the sponsor issues preferred shares ahead of your common units or charges substantial monitoring fees, your rollover equity can be completely eroded.

First, demand pari passu equity standing. Insist that your rollover shares share the identical class, voting privileges, and economic ranking as the sponsor equity. If the private equity firm takes preferred units carrying an eight percent compounding preferred return, your rollover value should be invested into that exact same preferred tier on identical terms, rather than subordinated common equity.

Second, secure protective minority governance covenants in the operating agreement. You must have explicit consent rights over actions that could dilute your equity or alter distributions: issuing senior equity tranches, taking on debt exceeding agreed leverage ratios, paying unbudgeted management fees to the sponsor, or executing affiliate transactions. Finally, secure tag-along rights to guarantee you can cash out whenever the sponsor sells their majority position, along with full access to audited annual statements and board reporting packages. Never accept rollover equity as headline purchase price without verifying the distribution waterfall.