Management Equity and Rollover Checklist: A Practical Checklist

Document type: Checklist Practice area: Corporate — Executive Compensation Jurisdiction: United States (federal and Delaware) Last reviewed: 5 September 2026

How to use this checklist

Sections 1 and 2 come before any negotiating position is taken. Sections 3 through 6 are the package. Sections 7 through 9 are the documents and the deadlines. Section 10 is afterward.

Items marked [IRREVERSIBLE] carry a hard deadline with no relief. Items marked [DECIDES VALUE] move the most money.

1. Representation and process

Separate counsel engaged for the management team before the term sheet is signed. [DECIDES VALUE]
Fee arrangement agreed; sponsor reimbursement negotiated and capped.
Conflicts among team members assessed; common representation waiver obtained, or separate counsel where interests diverge materially.
Whether a special committee of disinterested directors is required, given management's positions on both sides.
Independent financial and legal advice for the committee where one is formed.
Sequencing decided: price negotiated before the management package where possible.
Management arrangements disclosed in full to the board, committee, and approving stockholders.
Manager recused from board votes on the transaction and on the package; record kept.

2. Model before you negotiate

Capital structure obtained in full: debt quantum and terms; sponsor equity amount, class, preference, and preferred return; rollover amount; pool size.
Three exit scenarios modeled at year five: flat, moderate, strong. [DECIDES VALUE]
For each: debt repaid; sponsor preference and accrued return; capital returned; residual split.
For each: value of cash at closing, rollover equity, time-vested incentive, performance-vested incentive.
Flat case computed honestly — if rollover equity is worth zero at an exit equal to the purchase price, that fact drives the entire negotiation. [DECIDES VALUE]
After-tax outcome modeled, including capital versus ordinary character and the three-year holding period of 26 U.S.C. § 1061.
Model built independently, not adopted from the sponsor's materials.

3. The rollover

Instrument identified: what class of security does the rollover buy? [DECIDES VALUE]
Ranking against the sponsor's security determined: pari passu, a proportionate strip, or common behind a preference.
Per-unit price confirmed identical to the sponsor's.
Rollover percentage agreed, and affordability assessed against the manager's own position.
Whether the rollover is computed pre-tax or post-tax — rolling a percentage of gross proceeds means paying tax on a smaller cash portion.
Non-recognition confirmed in writing under 26 U.S.C. § 721 (partnership/LLC vehicle) or 26 U.S.C. § 351 (corporate vehicle, control requirement satisfied). [DECIDES VALUE]
Reorganization treatment under 26 U.S.C. § 368 considered where relevant.
Mechanics confirmed: direct contribution of target equity versus sale-and-purchase, documented consistently.
Reporting positions agreed between the parties' tax advisers.
Representations required of the manager reviewed and limited.

4. The incentive pool

Pool size stated on a fully diluted basis.
Amount granted at closing versus reserved for future hires.
Anti-dilution: obligation to increase the pool on future issuances so the intended percentage is preserved. [DECIDES VALUE]
Instrument selected: profits interests (LLC); incentive stock options under 26 U.S.C. § 422; non-qualified options; restricted stock or units under 26 U.S.C. § 83; or phantom equity.
Threshold or strike set at transaction value, supported by a contemporaneous valuation. [IRREVERSIBLE for options — a below-FMV strike creates deferred compensation under 26 U.S.C. § 409a]
Participation point identified: does the pool share from the first dollar of appreciation, or only after the sponsor's capital and preferred return? [DECIDES VALUE]
Whether incentive equity participates in interim distributions.
Tax distributions provided to cover phantom income allocated to profits interest holders.
Allocation across the team documented and communicated.

5. Vesting

Time-vesting schedule: period, cliff, frequency.
Acceleration trigger: single or double trigger (change of control plus qualifying termination).
Performance hurdles stated: MOIC, IRR, or both; and whether the greater or lesser applies.
Linear interpolation between hurdles rather than cliffs. [DECIDES VALUE]
Interim distributions count toward the hurdles — otherwise a dividend recapitalization delivers return to the sponsor and nothing to vesting. [DECIDES VALUE]
Follow-on sponsor capital added to invested capital at cost only, with resulting earnings counted — otherwise an add-on strategy moves the hurdle away continuously. [DECIDES VALUE]
Vesting to the extent hurdles are met by the exit transaction itself.
Measurement definitions: invested capital, proceeds, valuation of in-kind consideration and escrows, and who computes.
A worked vesting example at three exit values appended to the award agreement.

6. Leaver provisions and call rights

"Cause" narrowed to: felony conviction or plea; fraud, embezzlement, or theft; willful misconduct or gross negligence causing material injury; uncured material breach after written notice. [DECIDES VALUE]
Cause determination requires written notice specifying the conduct and an opportunity to be heard.
Language resisted: failure to meet performance objectives; violation of any policy; conduct detrimental to the company; sole-discretion determinations.
"Good reason" included: material diminution of duties, authority, title, or reporting; material reduction in base or target bonus; relocation beyond a stated distance; material company breach — each with notice, cure, and a resignation window. [DECIDES VALUE]
Rollover equity carved out of bad leaver discounts entirely — it is purchased capital, not compensation. [DECIDES VALUE]
Voluntary resignation without good reason: good leaver treatment after a stated cliff, or a defined discount rather than repurchase at cost.
Good leaver categories defined: death, disability, termination without cause, resignation for good reason, retirement.
Unvested treatment on each departure type stated.
Valuation mechanism: board determination in writing with methodology, subject to an independent appraisal right with cost-shifting if the appraisal exceeds the board figure by a stated margin. [DECIDES VALUE]
Whether marketability and minority discounts apply, and if so, capped.
Payment terms: cash at closing where possible; if a note, market interest, maximum term, security, and acceleration on a change of control or recapitalization.
Call right window and expiry stated.
Understanding recorded that the implied covenant will not override express redemption terms — Nemec v. Shrader, 991 A.2d 1120 (Del. 2010).

7. Employment agreement

"Cause," "good reason," and "change of control" identical across the employment agreement, the equity plan, and the award agreements. [DECIDES VALUE]
Term and renewal, or at-will with severance.
Base salary and review mechanism.
Target bonus stated as a percentage with metrics and who sets them; discretionary bonus resisted.
Severance: multiple of base plus target bonus; benefit continuation; pro rata bonus; outplacement.
Termination triggering severance also triggers good leaver treatment.
Restrictive covenants: non-compete scope, duration, geography; definition of the restricted business; employee and customer non-solicit; passive investment carve-out.
Whether covenants sit in the purchase agreement (sale-of-business context, more enforceable) or the employment agreement.
Forfeiture-on-breach linkage limited to material breach, after notice and cure, determined by a court or arbitrator, with a defined clawback period.
Indemnification agreement with advancement; D&O coverage confirmed, including a tail on exit.
Section 409A compliance reviewed for severance, deferred bonus, and any later-year payment, including specified-employee delay.

8. Deadlines and elections

26 U.S.C. § 83(b) election filed within thirty days of transfer. No extension, no relief. Calendar on the grant date for day twenty; file with proof of mailing; retain proof permanently. [IRREVERSIBLE]
Protective 83(b) election filed for profits interests notwithstanding zero grant value.
Filing responsibility confirmed as the individual's, not the company's.
26 U.S.C. § 280G analysis started at least six weeks before closing. [IRREVERSIBLE — the vote must occur before the change of control]
Disqualified individuals identified; base amounts computed; parachute payments determined including equity acceleration.
Written waivers obtained from each individual, conditioned on approval.
Adequate disclosure of all material facts to shareholders.
Approval by more than seventy-five percent of voting power, excluding shares held by disqualified individuals, completed before closing.
26 U.S.C. § 4999 excise tax exposure quantified if the exception is unavailable; gross-up or cutback approach decided.
Securities exemption confirmed for the grants and the rollover — compensatory plan exemption under 17 C.F.R. Part 230 or the private offering exemption of 15 U.S.C. § 77d(a)(2); financial statement and risk factor delivery obligation checked.
State blue sky filings made.
Grant dates and vesting commencement dates documented contemporaneously with approval.

9. Equity-holder protections

Transfer restrictions reviewed; permitted transferee definition covers the manager's estate planning vehicles.
Drag-along limited: same form and per-security consideration as the sponsor; representations limited to title, authority, and no conflicts; several not joint liability; indemnity capped at proceeds received; no new restrictive covenant or employment agreement imposed as a condition. [DECIDES VALUE]
Tag-along applies to partial sales and to incentive as well as rollover equity; affiliate transfers addressed.
Preemptive rights, or at minimum pool anti-dilution.
Information rights: annual audited or reviewed financials; quarterly statements; an annual fair market value determination; notice of material events.
Board seat or observer right, with indemnification and D&O coverage extended.
Protective provisions, if any, on matters affecting the class.

10. After closing

All documents retained permanently, with the 83(b) proof of filing.
Information rights exercised annually — a right nobody uses stops being honored.
Time vesting tracked on a calendar.
Invested capital and cumulative distributions requested from the CFO annually and a running performance-vesting computation maintained.
Events checked against the documents when they occur: dividend recapitalization; follow-on equity investment; add-on acquisition; refinancing; change in the pool.
Leaver consequences reassessed before any voluntary departure — the difference between month thirty-five and month thirty-seven can be the whole position.
Before an exit: waterfall position, vesting status, tax character including 26 U.S.C. § 1061, and drag-along obligations re-modeled with actual numbers.