We are executing a majority recapitalization and rolling over twenty-five percent of our equity, but we are worried about getting diluted or squeezed out by the private equity sponsor. How do we structure our rollover equity to protect our minority share?

Question

Tyler Smith · Accepted Answer

Rolling over equity can lead to a highly lucrative second bite of the apple, but only if you negotiate robust minority protections upfront. Private equity sponsors often use complex share classes and liquidation preferences that place their capital ahead of yours. To prevent getting squeezed out, require that your rolled equity is structured as pari passu with the sponsor's equity. This means your shares must have the exact same rights, liquidation preferences, and distribution priorities as theirs. If they get paid, you get paid on a pro-rata basis. Next, address dilution. Negotiate pre-emptive rights that allow you to participate in any future capital calls to maintain your twenty-five percent ownership. If you do not have the cash to participate, ensure that any dilution is calculated based on fair market value, not an arbitrary low valuation set by the sponsor. Finally, secure drag-along and tag-along rights. Tag-along rights are critical; they ensure that if the sponsor sells their majority stake to a third party, you have the right to join the transaction and sell your minority stake on the exact same terms. By securing these structural protections, you align your interests with the sponsor and ensure your minority equity is a valuable asset, not a target for dilution.