What is rollover equity?

The mechanics

Instead of receiving the entire purchase price in cash, you reinvest a portion of it into the entity that now owns your business. Typically ten to thirty percent of your proceeds, though it varies widely.

You end up holding a minority stake alongside the private equity firm. When they sell the business again, usually in three to seven years, your stake is sold at the same time and at the same price per unit.

Why it is offered

Partly alignment. A buyer wants the owner who knows the business to care about what happens next, and money is the most reliable way to arrange that.

Partly financing. Every dollar you roll is a dollar the buyer does not have to fund at closing.

Both of those are legitimate. They are also both reasons that serve the buyer, which is worth remembering when rollover is presented purely as a favour to you.

The case for it

If the platform performs, the returns can be substantial. Private equity firms buy at one multiple, grow earnings, add acquisitions, and aim to sell the larger entity at a higher multiple. A minority holder participates in all of that.

Rolled equity can also be structured to defer tax on that portion until the second sale, which has real value. Whether it does in your case depends on the structure, and it needs to be confirmed with your accountant rather than assumed.

The case for caution

You will hold a minority position with little or no control. You will not decide when the business is sold, at what price, or whether more debt is taken on in the meantime.

Your stake can be diluted by subsequent equity issuance. It may sit behind preferred returns, meaning the sponsor gets paid first and you participate only in what is left above a threshold. Read exactly where you sit in the waterfall, because two rollover positions of the same headline percentage can be worth very different amounts.

And the second sale may not happen on the timeline anyone expects. Holding periods extend. Markets change. The money is not liquid, and there is generally no mechanism to get it out early.

Questions to ask before agreeing

Where does my equity sit relative to the sponsor's preferred return, and what is that preference?

Can I be diluted, and under what circumstances?

What are my rights if the business is sold, and can I be forced to sell alongside them?

What information am I entitled to receive, and how often?

What happens to my equity if I leave, or if my employment is terminated? Is there a repurchase right, and at what price?

Is the rollover structured to defer tax, and has my own accountant confirmed that independently?

A simple discipline

Ask yourself whether you would invest that amount of cash into this platform if it were offered to you as a standalone investment, with no transaction attached.

If the answer is yes, roll with confidence. If the answer is no, then rollover is not upside, it is a portion of your purchase price you are being asked to leave on the table, and it should be negotiated down or valued accordingly.