The private equity buyer is requiring our leadership team to roll over twenty percent of our equity into their holding company. How do we evaluate the true value of rollover equity, and what class of shares must we demand to avoid being wiped out?

Question

Tyler Smith · Accepted Answer

Private equity sponsors use rollover equity to ensure leadership has skin in the game. While sponsors pitch this as an opportunity to secure a second bite of the apple when the platform exits in three to five years, rollover equity is the highest-risk capital in the transaction. If the acquisition is loaded with senior debt and preferred returns, your rollover can easily be rendered worthless in a downturn.

To protect value, examine the capitalization structure of the acquiring entity. You must demand the exact same class of equity that the sponsor holds, known as pari passu common units. Reject structures where your rolled proceeds are placed into common units while the sponsor takes preferred units bearing an eight or ten percent compounding preferred return. In a preferred structure, the sponsor collects their capital plus interest before you receive a single dollar upon the next exit.

Beyond share class, negotiate minority governance protections. Your purchase and operating agreements should include tag-along rights, ensuring that if the sponsor sells their stake, you have the contractual right to sell your shares on identical terms. Insist on preemptive rights to prevent dilution from future equity issuances, and secure information rights that guarantee access to quarterly financial statements and annual budgets.

Finally, assess whether your leaders are in the right seats on the post-close Accountability Chart to actually influence enterprise value. Rollover equity should never be viewed as guaranteed money. Treat it as an aggressive reinvestment, and ensure the cash proceeds received at close fully satisfy your financial baseline.