The private equity buyer requires us to roll over twenty percent of our equity into their new holding company as a condition of the deal. How do we ensure our rollover equity is valued on the same terms as their capital and protected against future dilution?

Question

Tyler Smith · Accepted Answer

Private equity firms demand rollover equity to ensure operational alignment and reduce their upfront cash check. While a successful second bite of the apple can generate substantial returns on a secondary recapitalization, rollover equity carries real risk if the sponsor layers preferred securities ahead of your interest.

First, demand pari passu equity treatment. Your rollover dollars must purchase the exact same class of equity units at the exact same share price as the sponsor's primary fund. If the sponsor receives preferred equity with an eight percent compounding annual distribution while your rollover is placed into common units, your equity can be entirely wiped out if the company achieves only modest growth.

Second, protect against structural dilution and governance capture:

- Secure tag-along rights, ensuring that if the sponsor sells their majority position, you have the contractual right to sell your shares on identical financial terms.
- Negotiate pre-emptive rights, granting you the option to participate pro-rata in future equity offerings to avoid predatory dilution.
- Demand drag-along protections requiring minimum valuation floors or return hurdles before you can be forced into a future sale.
- Mandate detailed financial reporting covenants, including monthly balance sheets, income statements, and debt compliance reports, so you can track operational performance without needing a board seat.