The buyer is insisting that our rolled-over equity be structured as common stock, while their equity investment is structured as preferred stock with a liquidation preference. How do we ensure our rollover equity is priced and protected on the exact same terms as their cash investment?

Question

Tyler Smith · Accepted Answer

When a buyer requires you to roll over equity into their platform or holding company, they are asking you to reinvest a portion of your wealth into their future. If they structure their cash investment as preferred stock while giving you common stock, they are placing you at a severe disadvantage. In a liquidation scenario, they will get their money back first, which can easily wipe out the value of your common shares.

You must insist on pari passu terms, meaning your rollover equity is structured on the exact same terms as the buyer's new equity investment. If they receive preferred stock, you must receive preferred stock of the same class, with the same liquidation preferences and dividend rights. This aligns your incentives and ensures that you win or lose together.

If the buyer claims their institutional investors require preferred terms, propose a hybrid structure. You can agree to accept common stock only if you receive protective governance covenants. These must include veto rights over major corporate decisions, tag-along rights that allow you to sell your shares on the same terms if they sell theirs, and pre-emptive rights to prevent your shares from being diluted in future funding rounds. Never accept paper equity that is subordinated to the buyer's capital stack without robust structural protections.