We are rolling over twenty percent of our equity into the buyer's new platform, but the private equity firm is funding the acquisition with high-interest senior debt. How do we structure our rollover equity to ensure we are not wiped out by their debt leverage in a downside scenario?

Question

Tyler Smith · Accepted Answer

Rolling over equity into a private equity platform can lead to a highly lucrative second bite of the apple, but if the buyer loads the company with excessive senior debt, your minority equity position is at serious risk. In a downside scenario, high-interest debt payments can wipe out the equity value entirely.

To protect your rollover, negotiate for par-passu terms, meaning your rolled-over equity has the exact same rights, preferences, and distribution priorities as the sponsor's equity. Avoid structures where the sponsor receives a preferred return or a liquidation preference that sits ahead of your common stock.

Additionally, negotiate for protective covenants in the shareholder agreement. These covenants should give you veto rights over major corporate decisions, such as taking on additional debt, changing the management fees paid to the sponsor, or diluting your ownership percentage through subsequent equity raises.

During your quarterly planning, treat the monitoring of this rollover structure as a critical financial priority. Ensure your leadership team has a clear understanding of the new holding company's capital structure and that your seats on the advisory board are filled by individuals who have the GWC to protect your interests.

By securing strong minority protections and equal distribution rights, you turn a high-risk rollover into a well-protected investment, ensuring you participate fully in the ultimate upside when the platform exits.