Rollover Equity

Sponsors value rollover for three reasons. Alignment: a founder who reinvests 20-40% of proceeds is financially motivated to make the business succeed under new ownership, not coast. Signaling: a seller willing to keep skin in the game implicitly vouches that the business has more upside — a seller demanding 100% cash raises questions about what they know. Capital efficiency: every dollar the seller rolls is a dollar of equity the sponsor doesn't have to fund, lowering the sponsor's cost basis and boosting its MOIC on the same deal.

From the seller's side, rollover offers a 'second bite of the apple': they take chips off the table now (de-risking their personal net worth) while retaining upside on the next exit, when the sponsor's value-creation plan has played out. A founder who rolls 30% into a platform that triples in value over five years can earn more on that rolled stake than on their original cash-out. Rollover is also frequently structured to be tax-deferred — if the seller receives equity rather than cash, the gain on the rolled portion can defer taxation until the second exit, a major incentive.

Rollover is typically expressed as a percentage of the equity purchase price (often 10-40%) and is documented so the rolled equity sits in the new HoldCo alongside the sponsor's. Key structuring questions: Does the seller roll into the same class of equity as the sponsor (pari passu) or junior common? Is the rollover structured as a tax-free exchange? And what are the vesting, governance, and liquidity terms? Sponsors generally prefer rollover into common equity so management's return is leveraged the same way the sponsor's is — fully aligned on the equity upside.