The buyer is requiring us to roll over fifteen percent of our equity into their new holding company, but we are worried about being diluted or wiped out by senior debt. How do we structure this rollover equity to protect our long-term payout?

Question

Tyler Smith · Accepted Answer

Rollover equity is a common tool for private equity buyers to keep founders motivated post-transaction, but it is often structured to benefit the sponsor at your expense. If the buyer loads the holding company with senior debt or structures their own equity with heavy liquidation preferences, your fifteen percent rollover could easily be diluted to zero when they execute their secondary exit.

To protect your rollover, you must negotiate for pari passu treatment, meaning your rolled equity is the exact same class of stock as the buyer's equity, sharing the same rights, distribution preferences, and liquidation terms. Do not accept common units if the buyer is holding preferred units with compounding interest or priority distribution hurdles.

You must also build in strong anti-dilution protections. Require veto rights over any future equity issuance that does not offer you pre-emptive rights to maintain your ownership percentage. Additionally, secure tag-along rights so that if the majority owner sells their stake, you have the absolute right to sell your rollover equity on the exact same terms. By focusing on the structural details of the equity rather than just the percentage, you ensure your rolled equity actually captures its fair share of the future value your team helps create.