Considerations for a partial buyout and partial rollover of equity?

by a searcher

4 years ago

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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searcher from University of Pennsylvania - The Wharton School

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?

4 years ago | like reply | 1 like

searcher from University of Pennsylvania - The Wharton School

Financial analysis / structuring etc. will be important like any other transaction. But keep a very close eye on the culture, governance & loyalties etc. I think it could be a plus if you strike the right relationship with the staying co-founder. Address as many things with him/her and get a comfort feel that you can work with him/her and lead the team....

4 years ago | like reply | 0 likes

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