What a majority recapitalization is
In a full sale, the founder sells the whole business, takes the proceeds, and leaves, usually after a transition period. In a majority recapitalization, the founder sells control, usually to a financial buyer such as a private equity firm, takes cash, and keeps a stake in the new company. That stake is rollover equity: the founder's reinvestment of part of the proceeds into the new ownership entity.
If the buyer grows the business and sells it again, often in four to seven years, the founder is paid a second time on the stake they kept. That second payment is the second bite. When the buyer is a capable platform investor, the second bite can exceed the first. When it is not, the stake can be worth nothing.
Why do buyers offer this structure? A private equity platform buying a base to build on wants the founder's knowledge and commitment after closing, and a founder with money still in the business has a reason to help it grow. Rollover also reduces the cash the buyer has to find at closing. Both reasons are legitimate. Neither is a reason for you to roll more than suits you.
That range, from more than the first sale to nothing at all, is the whole decision. This article is about how to make it.
Who a recap suits
Structure trades certainty for upside. The playbook's certainty curve places the common structures along that trade-off.
| Structure | What it trades |
|---|---|
| Minority sale, keep control | Most upside, least certainty, least liquidity. |
| Majority recap with 20% to 40% rollover | Meaningful cash now, a second bite later. |
| Full sale with an earn-out | Most cash now; some of it at risk. |
| Full cash sale | Certain and final. |
Illustrative. The rollover range is an example, not a recommendation for any business.
None of these is right in general. A recap suits a founder for whom three things are true. The cash at close already covers the number they need for the next chapter, after tax. They believe in the buyer's plan and its record of carrying plans out. And they want to stay involved, in some form, in what the business becomes.
A recap can also suit a founder who believes the business has more growth in it than a buyer will pay for today. Rolling equity lets that founder take part in the growth with a partner that brings capital and experience, rather than funding it alone.
It does not suit a founder who needs every dollar now, a founder who is rolling equity because the buyer asked, or a founder who is rolling because the headline looked better with the rollover included.
How much to roll
Rollover equity is a bet on the buyer. The playbook's rollover decision matrix asks two questions before that bet is placed. Does the cash you receive at close cover the number you need? And how confident are you in the buyer's plan and its track record? The answers place a founder in one of four corners.
- Covered and confident: roll meaningfully. You are secure, and you believe in the buyer. This is where the second bite lives. The playbook's illustrative example is a rollover of 20% to 40%, with governance rights attached.
- Covered but unconvinced: roll a token amount, or none. You are secure, but the buyer is unproven. Keep the rollover small and negotiate price instead.
- Confident but not covered: roll less than they ask. You trust the buyer, but you cannot afford the risk. Take cash first, roll a small amount, and revisit at the next round.
- Neither covered nor confident: do not do this deal on these terms. Widen the field of buyers, or change the structure.
Notice that the first question is about your number, not the buyer's. A buyer that wants a larger roll is asking you to share its risk. That can be a good trade. It is only a good trade if you can afford to lose what you roll.
The rights that come with the stake
Rollover equity is a minority stake in a company someone else controls. What protects it is not the size of the stake but the rights attached to it, and those are negotiated before exclusivity, while the buyer still has competition. Your attorney drafts and reviews them. These are the questions to bring to that conversation.
- The same terms as the buyer. Does your equity sit alongside the buyer's on the same terms, or does the buyer's own investment get paid back first?
- A voice. Will you have a board seat or an observer seat? What information will you receive, and how often?
- Protection from dilution. If the buyer raises more money or issues new shares, what happens to your percentage?
- The exit. When the buyer sells, are you entitled to sell on the same terms, at the same time?
- Leaving early. If your role ends before the buyer sells, what happens to your stake, and at what value?
A buyer that intends to treat rolling founders as partners will have clear answers to all five. Vague answers now tend to become unwelcome surprises at the second sale.
What to ask about the buyer's last three exits
The second bite depends almost entirely on the buyer. Before you roll, find out how the buyer has done this before. Ask about its last three exits.
- How long did it hold each business, and how did that compare with the plan it presented at the start?
- Did the businesses grow under its ownership, and how: by improving operations, by acquiring other companies, or by adding debt?
- What did the founders who rolled equity receive when each business was sold, compared with what they were told to expect?
- Who bought each business, and on what terms did the founders' equity sell?
- Can you speak with those founders directly?
A buyer confident in its record will answer these questions. A buyer that will not answer them has told you something about the second bite.
Three paths over seven years
The playbook's second bite model compares three paths over seven years, with illustrative shapes rather than any one business's numbers. Each line is the founder's cumulative proceeds after tax, from today to year seven.
| Path | What happens to the founder's proceeds |
|---|---|
| Keep the business | They rise gradually through distributions. There is never a single step. |
| Full sale today | One step at year zero to the after-tax proceeds, then flat, plus modest growth on what is reinvested. |
| Sell 70%, roll 30% | A smaller step at year zero, then a second, larger step at year five: the second bite. Its size ranges from a buyer who underperforms to a buyer who doubles the business. |
Illustrative. The width of the range at year five is the whole decision.
The model does not tell you which path to take. It shows you what each one depends on. The full sale depends on the price today. Keeping the business depends on you. The recap depends on the buyer, and on how much of the first sale you need to be certain of.
Read the recap path at its ends, not its middle. A buyer's presentation will tend to show the business doubling. Ask what the stake is worth if the business only holds its ground, and what it is worth if the buyer's plan fails and the business is sold under pressure or not at all. If the cash at close still covers your number in the worst case, the roll is a bet you can afford. If it does not, the size of the roll is wrong, however good the middle of the range looks.
Your CPA and financial advisor can work out the after-tax numbers for your own situation. Whether to trust the buyer with the second half of your outcome is a decision only you can make, and it deserves the same diligence the buyer is about to do on you.