We are being asked to roll over fifteen percent of our equity into the buyer's holding company, but we want to protect ourselves from dilution. How do we structure our rollover?

Question

Tyler Smith · Accepted Answer

Rolling over fifteen percent of your equity into a buyer's holding company can be highly lucrative, but without proper shareholder protections, you risk being diluted or locked out of a future liquidity event. Buyers often use aggressive drag-along rights to force minority shareholders to accept a future sale on terms that only benefit the majority owner. To protect your rollover equity, you must negotiate critical governance and economic rights in the holding company's operating agreement. First, demand robust tag-along rights, which guarantee that if the majority owner sells their shares, you have the right to join the transaction on the exact same terms. Second, negotiate liquidation preferences that ensure your minority shares are paid out before or alongside the buyer's equity, protecting you from being squeezed out in a recapitalization. Third, secure a seat on the board of directors or veto rights over key corporate actions, such as taking on excessive debt or issuing new dilutive shares. Align these protections with the long-term vision in your V/TO. By treating your rollover equity as a strategic partnership rather than a passive investment, you can ensure your hard-earned equity is fully protected and positioned for growth.