The buyer is insisting on a rollover equity structure where we keep twenty percent of our equity in their new holding company, structured via an F-reorganization. How do we value this rollover equity and protect ourselves from being diluted down to nothing?

Question

Tyler Smith · Accepted Answer

Rollover equity is a common way for buyers, especially financial sponsors, to bridge a valuation gap and keep you aligned with their growth goals. However, rollover equity is often valued using different assumptions than your cash proceeds. If you are rolling twenty percent of your equity into a new entity, you must ensure that your rollover is structured on a pari passu basis, meaning you share the same terms, class of stock, and rights as the buyer's equity. Many buyers will try to issue you common units while they hold preferred units with liquidation preferences. This means they get paid back their entire investment first, plus a guaranteed return, before your rollover equity sees a single dollar. You must insist on receiving the same class of equity as the majority investor to protect against this. Next, protect yourself from dilution. Ensure the operating agreement has strict anti-dilution provisions and pre-emptive rights, allowing you to participate in future capital raises to maintain your ownership percentage. You also need to negotiate minority protections, such as a seat on the board or veto rights over major corporate decisions, like taking on excessive debt or selling the company at a low price. Finally, use your EOS tools to maintain visibility. Even as a minority owner, you should negotiate rights to receive quarterly financial packages and operational updates, keeping the new entity accountable to the V/TO and the long-term plan you helped build. Treat rollover equity as a second bite of the apple, but only if you lock in the protective covenants to secure its value.