The private equity buyer is insisting on a fifteen percent rollover of our equity but we want to ensure our minority shares cannot be diluted or wiped out by future debt recaps. How do we structure our governance protections in the operating agreement?

Question

Tyler Smith · Accepted Answer

Rollover equity can be a highly lucrative second bite of the apple, but without the right protections, you risk holding worthless paper. Private equity buyers often use complex capital structures, preferred shares, and debt recaps that can dilute minority shareholders.

To protect your rollover equity, you must negotiate strong governance rights and structural protections directly into the post-close operating agreement.

First, demand tag-along rights and drag-along protections. Tag-along rights ensure that if the majority owner sells their stake, you have the right to join the transaction on the exact same terms. Drag-along protections should require a minimum valuation threshold so you are not forced to sell your equity at a loss.

Second, secure veto rights over key corporate actions. This includes major debt issuances, changes to the capital structure, or transactions with affiliates that could artificially reduce the value of your common shares.

Third, use your V/TO® to align on the core target exit horizon with the buyer. Make sure your strategic visions are identical. If the buyer is planning a quick flip but you are looking for long-term growth, the misalignment will create post-close friction.

By treating your rollover equity as a strategic investment rather than a passive holding, you protect your upside and ensure you are treated as a true partner in the next chapter of the business.