Rollover Equity refers to the exit proceeds reinvested by a seller into the equity of the newly formed entity post-acquisition. An equity rollover is therefore designed to align the economic incentives among participants in the post-transaction entity.
Equity rollover aligns the interests of the seller and the buyer post-close and mitigates the risks related to losing key personnel, i.e. the loss of critical employees, most often of corporate executives or department heads that are integral to the company’s continued, long-term success. The phrase “second bite at the apple” is frequently used to describe the rollover equity concept.
- “First Bite”: The initial sale of the company’s equity, wherein the majority ownership shifts from the seller to the new buyer.
- “Second Bite”: The secondary transaction in which the new owner – the buyer in the prior acquisition – decides to exit and monetize the investment (and any holders of rollover equity would also benefit from such an exit).