Jun 13, 2025
Who are General Partners in Private Equity?
Learn who General Partners in private equity are, their key responsibilities, how they're compensated, and how they differ from Limited Partners.
In mergers and acquisitions (M&A), especially those involving private equity (PE), one term that often surfaces in negotiations is rollover equity.
Rollover equity becomes particularly important when sellers (often founders) agree to reinvest a portion of their proceeds into the new company structure, effectively "rolling over" part of their equity stake. In a time when private equity firms increasingly favor aligned incentives and shared risk, rollover equity is becoming a common feature in buyouts, especially in founder-led businesses.
This mechanism offers the opportunity for a “second bite at the apple”: sellers realize immediate liquidity while retaining a meaningful interest in the company’s growth under new ownership.
As rollover equity becomes more prevalent, knowing its mechanics, benefits, and potential pitfalls is essential for handling M&A deals with confidence.
Rollover equity, also known as an equity rollover, refers to the portion of a seller’s ownership stake that is retained or reinvested into the acquiring company as part of a merger or acquisition. Instead of receiving the entire purchase price in cash, the seller converts a portion into equity in the post-transaction entity.
This mechanism serves multiple purposes in private equity transactions. From the seller's perspective, rollover equity provides an opportunity to maintain skin in the game while accessing partial liquidity. From the buyer's standpoint, it reduces the immediate cash requirement and ensures management remains committed to the company's success post-acquisition.
In an M&A transaction, rollover equity allows the seller—often a founder or early investor—to retain interest in the company by putting back a part of their sale proceeds into the new ownership structure. Rather than taking the full purchase price in cash, the seller agrees to exchange part of their equity for shares in the post-acquisition company.
This approach gives sellers the opportunity to benefit from the future growth of the company, especially when a private equity firm is involved and aims to exit at a higher valuation. The rollover is typically negotiated during the transaction and is structured as part of the deal terms.
For instance, if a private equity firm acquires a business for $80 million and requires a 25% rollover, the founder may receive $60 million in cash and reinvest $20 million into the PE firm’s holding company—retaining a 25% minority stake.
Rollover equity is a strategic tool to align incentives, mitigate downside risk, and create the potential for a “second bite of the apple” when the company is sold or goes public in the future.
The formula to calculate rollover equity is:
Rollover Equity = Seller Exit Proceeds × Rollover Percentage
Where:
The advantages of rollover equity for sellers extend far beyond the immediate transaction, creating opportunities for enhanced long-term wealth creation and strategic flexibility.
1. Upside Potential: The primary benefit lies in maintaining exposure to the company's future growth potential. If the new entity grows and is sold at a higher valuation, sellers can realize a second, often larger, payday.
2. Tax Advantages: Rollover equity can often be structured as a tax-deferred transaction, allowing sellers to defer capital gains tax on the rolled-over portion until they sell their stake in the new entity. This deferral mechanism enables sellers to reinvest their pre-tax proceeds, potentially accelerating wealth accumulation while achieving substantial tax savings for founders with significant capital gains exposure.
1. Retention of Key Personnel: Equity rollover helps retain critical employees and management, reducing risks related to talent loss post-acquisition.
2. Signal of Confidence: Sellers’ willingness to roll over equity signals belief in the company’s prospects, boosting buyer confidence.
3. Aligned Incentives: Sellers remain invested in the success of the business. This ensures that the seller's financial outcome is tied to the future performance of the company, promoting continued engagement and accountability. For buyers—especially private equity firms—this reduces the risk of disengagement post-close and helps drive value creation.
1. Illiquidity: Rollover equity is typically locked up until a future exit event, meaning sellers cannot easily convert it to cash and may have to wait years for liquidity.
2. Loss of Control: Sellers usually become minority shareholders with limited influence over major business decisions after rolling over their equity.
3. Complex Structuring: Legal and tax implications can be complex, especially in cross-border deals.
4. Continued Risk Exposure: The most significant drawback for sellers involves maintaining exposure to business risks they thought were exiting. Market downturns, competitive pressures, or operational challenges can erode the value of rolled-over equity, potentially making the seller worse off than if they had taken full cash at closing.
5. Valuation Disputes: Disagreements over the fair value of rollover equity can arise, particularly when the initial transaction valuation differs from subsequent valuations used for additional investments or exits.
6. Share Dilution Risk: Future financing rounds or management incentive programs can dilute the seller's rollover equity stake, potentially reducing their ultimate returns even if the business performs well.
Rollover equity may offer certain tax advantages for sellers. Typically, only the cash portion of the sale proceeds is taxed at the time of the transaction. The equity portion that's rolled over into the new company is usually not taxed immediately.
Instead, the rollover equity becomes taxable only when it's sold in a future liquidity event—such as a secondary sale, a buyout, or when the company is eventually resold. This deferral can be beneficial, especially if the value of the equity appreciates over time.
When that future sale occurs, any gain is typically taxed at capital gains rates—often lower than ordinary income tax rates—if held for the required period.
That said, the exact tax outcome depends on several factors, including the deal structure, legal entity types, and the tax status of both the buyer and seller.
Here are six key factors every founder or shareholder should assess before agreeing to roll over equity in a deal:
1. Percentage Rolled Over: Determine how much of your ownership you’re comfortable reinvesting. A higher rollover increases your exposure to future upside but limits your immediate liquidity. Choose a percentage that aligns with your appetite for risk and need for cash.
2. Track Record of the buyer: Look into the buyer’s performance in past deals. Have they built value and delivered successful exits? Founders should feel confident that the acquirer can grow the business and unlock value from their retained equity.
3. Post-Deal Growth Plans: Evaluate the acquirer’s strategy for scaling the company. Are they injecting capital, expanding into new markets, or improving operations? Your rollover equity’s future value will depend on how well these growth plans are executed.
4. Valuation and Dilution Risk: Ensure that your rollover equity is priced fairly relative to what other stakeholders are receiving. Also consider how future capital raises or preference structures might dilute your stake.
5. Tax and Legal Structure: The tax treatment of rollover equity can vary based on the structure of the transaction. In some cases, gains may be deferred and taxed at favorable capital gains rates later. Consult legal and tax advisors to understand your position.
6. Your Role After the Deal: Clarify whether you’re expected to stay on in an operational or advisory role. If so, make sure this aligns with your personal goals, energy, and timeline. Your level of involvement can also impact how your rollover equity performs.
Rollover equity isn’t just a deal term—it’s a strategic lever that can significantly shape your financial future after an M&A transaction. Reinvesting a portion of your proceeds signals belief in the company’s future while also opening the door to a second, potentially larger, liquidity event down the road. When structured thoughtfully, it can align incentives between you and the new owners, provide meaningful tax advantages, and allow you to continue participating in the value you helped create.
However, it’s not a one-size-fits-all solution. Deciding whether to roll over equity requires an understanding of your financial goals, risk tolerance, the buyer’s track record, and your desired level of involvement post-deal.
Rollover equity is when a seller of a company reinvests a portion of their sale proceeds into the equity of the acquiring or newly formed entity, retaining ownership and aligning interests with the buyer post-transaction
It can be, but may qualify for tax deferral depending on the structure.
