Considerations for a partial buyout and partial rollover of equity?

June 24, 2020

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Los Angeles, CA, USA

Reviewing an opportunity in which the company is 50/50 owned by two individuals. One would like to fully divest, while the other is interested in staying on. My initial thought it to fully buyout one partner and partially buyout the other - so the ownership structure would be something to the effect of 70/30 (or 75/25, 80/20 etc...). Interested in getting feedback and thoughts from folks that have pursued such a structure, the pros and cons and also working with a co-founder who will now assume a minority equity stake but maintain a leadership role in the company...

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Reply by a searcher
from University of Pennsylvania in Chicago, IL, USA

I would echo the remarks on the assessing culture/vision compatibility and assessing the owner as an executive - can you work with this person through thick and thin? Basically it is like getting married... 'til death do us part". Would you hire them to work in the role that they are in? That is a tough question to answer because of asymmetric information, but separating the concepts of ownership and employment I find can help. Judge the person as an executive - how are they at sales/strategic partnerships/product development/finance/budgeting/leadership etc. etc.? I have found that company training materials often reveal peoples' values - sales onboarding materials, employee handbooks, etc. Review those things for compatibility. Slicing up the pie is simply an extension of valuation and LOI negotiations. Ensuring that you can work together is far more important. Plan for and discuss what a "breakup" looks like. i.e. if you can't get on well, could this person be happy just being an "economic" owner with no involvement in running the company?

Reply by a searcher
from Stanford University in Dallas, TX, USA

This structure should be very attractive to the owner who is rolling over into the new deal, as he can roll over on a levered basis pari passu with the buyer. This allows him to have a significant liquidity event while minimizing the rollover equity requirement since he's getting the benefit of the new leverage. This works better if there is a low amount of existing debt that needs to be assumed or refinanced. This structure also aligns interest with the seller and buyer, so there is some continuity in management at the senior level. So overall this is a great option in my opinion.

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