We are rolling over fifteen percent of our equity into the buyer's holding company, but we are worried the private equity sponsor will sell their stake and leave us trapped. How do we structure tag-along rights and co-sale provisions to ensure we can exit on the exact same terms as the sponsor?

Question

Tyler Smith · Accepted Answer

A rollover equity deal means you are partnering with the buyer for their next growth phase, but as a minority shareholder, you are highly vulnerable. If the private equity sponsor decides to exit, you do not want to be left holding illiquid paper while they cash out. You must secure strong tag-along and co-sale rights in the shareholder agreement.

Tag-along rights dictate that if the majority owner sells their shares to a third party, they must include your minority shares in the transaction on the exact same economic terms and at the same valuation. This ensures that you are not left behind with a new, unknown majority partner who might not respect your legacy or team.

To make these rights airtight, ensure they apply to any transaction that results in a change of control, including recapitalizations, partial sales, or asset transfers. Specify that your payout must be in the same mix of cash and stock that the sponsor receives. If the sponsor gets ninety percent cash and ten percent rolled equity, you must get the exact same split, preventing them from structuring a cash-rich exit for themselves while leaving you with highly speculative paper.

Finally, include a right of co-sale. This allows you to participate proportionally in any secondary share sales the sponsor conducts before a full exit. If the sponsor sells ten percent of their holding to de-risk, you have the contractually protected right to sell ten percent of yours on the same terms.