A private equity sponsor wants us to roll over twenty percent of our equity into their new platform, but they are using a recapitalization structure that places senior preferred equity ahead of our common rollover shares. How do we negotiate protective provisions and liquidation preferences to ensure our rolled equity is not wiped out in a down-side scenario?

Question

Tyler Smith · Accepted Answer

Rolling over equity into a private equity platform can lead to a massive second pay day, but if you accept common shares while the sponsor holds senior preferred equity with a high accruing dividend, you are placing your capital at extreme risk. In a downside or even a mediocre exit, their liquidation preference can completely wipe out the value of your common rollover equity. To protect your investment, you must negotiate pari passu treatment, meaning your rolled equity sits in the exact same share class and security level as the sponsor's equity. If they refuse, you must secure robust protective provisions. First, demand a liquidation preference cap that limits the sponsor's preferred return before the common equity begins to participate. Second, secure veto rights over key corporate decisions, such as taking on excessive debt, issuing new classes of senior equity, or selling the company at a valuation below a specific threshold. These veto rights ensure you cannot be diluted out of your position without your explicit consent. Finally, negotiate a co-sale or tag-along right, which guarantees that if the sponsor sells their stake, you have the right to sell your shares on the exact same terms. This prevents you from being locked into a minority position under a new, hostile owner.