Should You Accept an Equity Rollover in an Acquisition Offer?
When a buyer offers to acquire your software or technology company, one of the most consequential decisions you’ll face is whether to accept an equity rollover—that is, to reinvest a portion of your proceeds into the acquiring entity rather than taking all cash at closing. This decision can significantly impact your financial outcome, risk exposure, and future involvement in the business.
In this article, we’ll explore the strategic, financial, and operational considerations behind equity rollovers, particularly in the context of private equity-backed acquisitions and growth-stage software exits. We’ll also share insights from recent transactions and how firms like iMerge help founders navigate this pivotal choice.
What Is an Equity Rollover?
An equity rollover occurs when a seller agrees to reinvest a portion of their sale proceeds—typically 10% to 40%—into the acquiring company or its parent entity. This is common in private equity transactions, where the buyer wants the founder or management team to retain “skin in the game” and participate in the next phase of growth.
For example, if your company is being acquired for $50 million and you agree to roll over 20%, you would receive $40 million in cash at closing and $10 million in equity in the new entity.
Why Buyers Propose Equity Rollovers
From the buyer’s perspective, equity rollovers serve several purposes:
- Alignment of incentives: Keeping founders invested encourages continued performance and strategic alignment post-close.
- De-risking the investment: Buyers prefer not to shoulder 100% of the risk, especially in growth-stage or founder-led businesses.
- Capital efficiency: Rolling over equity reduces the cash outlay required at closing, preserving capital for growth initiatives.
Private equity firms, in particular, often structure deals with rollovers to ensure that key operators remain engaged through the next liquidity event—typically a sale or IPO within 3–7 years.
Should You Accept a Rollover? Key Considerations
Whether to accept an equity rollover depends on your personal financial goals, risk tolerance, and confidence in the buyer’s growth plan. Here are the primary factors to evaluate:
1. Valuation and Upside Potential
Ask yourself: Is the acquiring entity likely to grow significantly in value? If the buyer has a strong track record of scaling businesses and achieving high-multiple exits, rolling over equity could yield a second, potentially larger payday.
For instance, if you roll over $10 million and the buyer exits at 3x the current valuation in five years, your equity could be worth $30 million—tripling your return on that portion.
However, this upside is not guaranteed. As we noted in EBITDA Multiples Continue to Trend Lower, market conditions and sector-specific headwinds can compress valuations, especially in SaaS and eCommerce sectors.
2. Liquidity Needs and Risk Appetite
Rolling over equity means deferring liquidity and taking on additional risk. If your primary goal is wealth diversification or retirement, a full cash-out may be more appropriate. Conversely, if you’re comfortable with illiquidity and believe in the buyer’s vision, a rollover can be a smart way to stay invested in a business you know well.
It’s also worth considering your broader portfolio. If most of your net worth is tied up in this one company, rolling over equity may increase concentration risk.
3. Governance and Control
What rights will you have as a minority shareholder post-transaction? Will you have board representation, information rights, or veto power over major decisions? These terms should be clearly defined in the shareholder agreement.
Without proper protections, you may find yourself locked into an illiquid investment with limited influence over its direction or exit timing.
4. Tax Implications
Equity rollovers can be structured in a tax-deferred manner under Section 351 or 721 of the Internal Revenue Code, depending on the deal structure. However, the specifics matter greatly. Poor structuring can trigger unintended capital gains or ordinary income tax at closing.
As we explored in Tax Law Changes and the Impact on Personal Taxes from Selling a Software Company, proactive tax planning is essential to avoid surprises. A qualified M&A advisor and tax counsel should be involved early in the process.
5. Exit Timeline and Liquidity Path
What is the buyer’s plan for exiting the investment? Is there a defined timeline, or are you signing up for an indefinite hold? Will there be opportunities for partial liquidity along the way?
Some private equity firms offer structured liquidity programs or drag-along rights that ensure minority shareholders participate in future exits. Others may not. Understanding the exit mechanics is critical before agreeing to a rollover.
Case Study: A SaaS Founder’s Rollover Decision
Consider a fictional but representative example: A founder of a $20M ARR SaaS company receives a $100 million acquisition offer from a growth equity firm. The offer includes 70% cash and 30% rollover equity in the new platform company, which will consolidate several vertical SaaS businesses.
After working with an M&A advisor like iMerge to model the potential outcomes, the founder sees that the rollover could be worth $60–$90 million in a future exit, assuming the platform achieves a 3–5x return. However, the founder also recognizes the risk: no guaranteed liquidity, potential dilution, and limited control.
Ultimately, the founder negotiates a reduced rollover of 20%, with enhanced governance rights and a put option after five years. This balanced approach preserves upside while managing downside risk—a strategy iMerge often recommends in similar scenarios.
How to Evaluate a Rollover Offer
Before accepting or rejecting a rollover, consider the following steps:
- Model the potential return scenarios (base, upside, downside).
- Understand the buyer’s track record and exit strategy.
- Review the shareholder agreement and governance terms.
- Assess your personal liquidity needs and financial goals.
- Consult with your M&A advisor, tax counsel, and wealth manager.
Firms like iMerge specialize in helping founders evaluate these trade-offs, negotiate favorable terms, and structure rollovers to align with long-term objectives.
Conclusion
Equity rollovers can be a powerful wealth-building tool—but they’re not for everyone. The right decision depends on your confidence in the buyer, your appetite for risk, and your broader financial picture. With the right structure and advisory support, a rollover can position you for a second exit that rivals—or exceeds—the first.
Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.
