Before You Commit · Rollover equity

Before You Accept Rollover Equity

The PE firm proposed rollover equity. The number feels generous. The structure decides what it actually is.

This page is for the owner reading rollover terms inside a private equity offer and trying to model what those terms mean five years out.

Short answer

Rollover equity is value retained in the new structure post-close. It looks like alignment; under common deal structures it is closer to dilution with vesting attached. Model both interpretations before agreeing. The cleanest test is to ask what the rollover becomes after the next recapitalisation, not after this close.

Fast extraction

Direct answers for the owner reading this on a busy week.

Each answer is a single direct read. The full read is in the body.

What is rollover equity?

Rollover equity is the portion of the seller's existing equity that converts into ownership of the new entity post-close. Instead of taking 100 percent of the proceeds in cash, the seller keeps a stake in the company under the buyer's structure.

Why do PE firms propose rollover?

Three reasons: alignment (the seller stays motivated), tax (deferred gain on the rolled portion), and signal (it shows the seller believes in the next chapter). All three can be true; only the alignment one matters for valuation modelling.

Is rollover the same as keeping ownership?

No. The seller owns a stake in the new structure with new governance, new debt service, new strategic direction, and new exit timing. The rolled-over equity is a different asset than the equity that was sold.

What can dilute rollover equity?

Subsequent recapitalisations, additional acquisitions funded by equity, management option pools, anti-dilution adjustments. Common range: 30-60 percent dilution over a typical hold period.

Money already moving

Legal fees, accounting work, tax planning, banker fees, internal modelling time, deal-team distraction.

Money usually lost

Modelling rollover at face value without modelling dilution from likely recapitalisations and option pools. The face value at close rarely survives to exit.

Blind spot

The rollover is shown as one number. The actual outcome depends on three or four downstream events the founder has not been shown the model for.

Decision map

The transaction is not the whole decision.

The cash portion is the easy modelling. The rollover portion requires modelling three to five years of recapitalisations, option pool refreshes, additional acquisitions, and exit timing. Each event affects the rollover's actual value at the founder's exit point.

Inspection list

What Stan would inspect before the yes.

Before the commit hardens

What is the exact dilution model for the rollover over the firm's expected hold.
What is the firm's typical hold period and historical exit timing.
What is the option pool refresh policy and who funds it.
What is the firm's M&A appetite and how are acquisitions funded.
What recapitalisations have the firm's portfolio companies done historically.
What is the tag-along, drag-along, and put-call structure on the rollover.
What does the founder receive if they leave the role inside the hold period.

Next gate

Read the pattern before applying.

Routes into the structural pattern beneath this decision.

PE Offer On The Table

The umbrella decision for the whole PE process.

Evaluating The PE Buyer

How to read the firm beyond the offer.

Reading The Term Sheet

The clauses that carry the real value transfer.

Founder Secondary Sale

When rollover is replaced or paired with secondary.

Ways To Work

Use this after the rollover model is clear.

Apply for Tier 03

When multiple principals are reading the same offer.

Rollover equity is modelled, not assumed. The face value at close is the start of the analysis, not the end.

If you want Stan to read this live decision, use the application route below.

When the decision is one commitment with real cost, Tier 03 is the commercial route.

Apply for Tier 03 Back to the hub