The private equity buyer wants us to roll over a significant portion of our equity into their holding company, but we are worried about getting diluted or shut out of a secondary payout. How do we structure our rollover equity rights and post-close operational milestones to ensure our minority stake is protected?

Question

Tyler Smith · Accepted Answer

Rolling over twenty percent of your equity into a private equity holding company can lead to a massive second payout, but only if you protect your minority stake. Financial sponsors often structure rollover equity with limited voting rights and unilateral call options that allow them to buy you out at a discount before the secondary exit.

To protect your interests, you must negotiate governance protections and operational alignment upfront. Demand a seat on the board of directors or at least observer rights so you have visibility into the company's financial decisions. Ensure your rollover equity has tag-along and drag-along rights, which guarantees you can participate in any future sale on the exact same terms as the sponsor.

Equally important is ensuring that the post-close operational milestones are realistic. Use your V/TO to align on the long-term vision and growth strategy for the combined entity. Ensure that the holding company's leadership team is run on a structured operating system like EOS to prevent chaotic mismanagement.

Your recommendation is to never accept silent, passive rollover equity. Structure your shareholder agreement to include veto rights over major capital decisions and ensure the post-close business is run with the same operational discipline that made it successful in the first place.