Management Rollover and Incentive Equity in Sponsor Deals: What the Team Actually Gets

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

Four hats, worn simultaneously

When a private equity sponsor buys a business, the management team occupies four positions at once, and the tension among them explains almost everything about how these deals are negotiated.

As sellers, managers who own equity want the highest price and the cleanest exit.

As rollover investors, they are putting a portion of their proceeds back in — becoming minority holders in a leveraged company controlled by someone else.

As employees, they are negotiating compensation, severance, and restrictive covenants with the same counterparty.

As incentive equity holders, they are receiving a new instrument whose value depends entirely on an exit that may be five to seven years away.

The conflict is structural and it is not resolved by good faith. The Delaware Court of Chancery examined a version of it in In re Trados Inc. Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013), where directors who held management incentive awards approved a transaction that paid the preferred stockholders and the management incentive plan and left the common stockholders nothing. The court found the process flawed and the directors interested — while ultimately concluding the common stock had no value, so no damages followed. The lesson is about process and disclosure, and it applies every time a manager sits on both sides.

For the manager's own lawyer, the practical point is simpler. These four roles have different counterparties' interests attached, and a manager represented by company counsel is represented by nobody. Separate counsel for the management team is not a luxury.

The rollover

What it is. Instead of receiving all cash, managers contribute a portion of their equity or their proceeds into the acquisition vehicle, receiving equity in the new holding company.

Why sponsors want it. Alignment, principally — a manager with meaningful capital at risk behaves differently. Also financing: rollover reduces the equity the sponsor must fund.

Why managers should think carefully. Rollover equity is a concentrated, illiquid, undiversified position in a leveraged company they do not control, held for an indefinite period. A manager rolling fifty percent of their proceeds has made a very large investment decision and should be told so in those words.

The tax question that determines the structure.

Tax-free rollover. If the acquisition vehicle is a partnership or LLC taxed as a partnership, a contribution of property in exchange for an interest is generally non-recognition under 26 U.S.C. § 721. If the vehicle is a corporation, 26 U.S.C. § 351 provides non-recognition where the contributing group controls the corporation immediately after — which requires the rollover participants and the sponsor to be treated as a single transferor group, a technical requirement the structure must satisfy.

Taxable rollover. If the structure does not qualify, the manager recognizes gain on the rolled amount without receiving cash to pay the tax — a genuinely painful outcome that the structure should be designed to avoid.

Reorganization treatment under 26 U.S.C. § 368 can apply in some structures, though sponsor buyouts more commonly run through § 721 or § 351.

The question that matters more than the percentage. Into what?

A manager who rolls into the same class of security the sponsor holds — the same units, the same preference, the same terms, on the same per-unit price — participates on the same economics as the sponsor. A manager who rolls into common while the sponsor holds preferred has taken a subordinated position: in a modest exit, the preferred return and the liquidation preference may consume the entire proceeds, and the rolled common receives nothing.

This is the single most consequential term in a rollover, and it is regularly agreed by managers who did not understand it. Ask: what does my rollover receive at each of three exit values? Then look at the numbers.

The incentive pool

Separate from the rollover, the sponsor establishes a management incentive pool — typically eight to fifteen percent of the equity on a fully diluted basis — to be granted to management over the life of the investment.

The instrument depends on the entity form.

Profits interests, in a partnership or LLC. The holder receives a share of future appreciation above a threshold set at the value on the grant date, so the interest has no value if the company were liquidated immediately. Properly structured, the grant is not a taxable event, and subsequent appreciation is capital gain. This is the most tax-efficient instrument available to management, and it exists only in pass-through entities.

Options, in a corporation. Incentive stock options under 26 U.S.C. § 422 offer favorable treatment subject to strict requirements — employee status, a hundred-thousand-dollar annual vesting limit, exercise price at or above fair market value, and holding periods. Non-qualified options are simpler and produce ordinary income on exercise equal to the spread.

Restricted stock or restricted units. Full-value awards subject to vesting. Taxed under 26 U.S.C. § 83 as ordinary income when the substantial risk of forfeiture lapses — unless an election is made.

Phantom equity or cash-settled appreciation rights. No actual equity; a contractual right to a payment measured by equity value. Simple to administer, ordinary income on payment, and subject to 26 U.S.C. § 409A unless carefully structured.

The pool's key terms.

Size, on a fully diluted basis, and — importantly — whether it is fixed or dilutable by future issuances. A ten percent pool that dilutes with every add-on acquisition is not a ten percent pool.

Allocation. How much is granted at closing and how much reserved for future hires and promotions. A pool that is fully allocated at closing leaves nothing for the people hired in year three.

Threshold or strike. Set at the transaction value, so management shares only in appreciation.

Vesting, discussed next.

Whether the pool participates before or after the sponsor's return. A pool that participates only after the sponsor receives a preferred return plus its capital is worth far less than one participating from the first dollar of appreciation.

Vesting

Time vesting. Typically five years, either ratably or with a one-year cliff followed by monthly or quarterly vesting. Straightforward and it rewards tenure rather than performance.

Performance vesting. Tied to the sponsor's realized return, and this is where the design choices matter.

Multiple of invested capital (MOIC). A portion vests at 2.0x, more at 2.5x, more at 3.0x. Simple, transparent, and it ignores time — a 2.5x achieved in eight years vests the same as one achieved in three.

Internal rate of return (IRR). Accounts for time, and it is harder for management to model and more sensitive to the timing of interim distributions.

Both. Common: vesting requires the greater or the lesser of a MOIC and an IRR hurdle.

The provisions that decide whether performance vesting is ever worth anything.

Measurement on realization only, or also on interim distributions? A sponsor that recapitalizes and takes a distribution has realized return; whether that counts toward the hurdle should be stated.

Treatment of follow-on capital. If the sponsor invests more, is that added to invested capital for the hurdle, and at what value? An add-on acquisition strategy funded with sponsor equity can move the hurdle away from management continuously.

Partial vesting between hurdles. Linear interpolation between 2.0x and 3.0x is far better for management than a cliff at each level, and it removes the incentive to hold for a marginal improvement.

Acceleration on a sale. Time-vesting awards commonly accelerate in whole or in part on a change of control; performance awards vest to the extent the hurdles are met by the transaction itself, which is the right answer.

Double-trigger acceleration — a change of control plus a qualifying termination — is common for time-vesting awards and is the balanced position. Single-trigger full acceleration is management-favorable and sponsors resist it because it removes the retention effect exactly when the buyer wants retention.

The tax elections that cannot be fixed later

The 83(b) election. Under 26 U.S.C. § 83, property transferred in connection with the performance of services is included in income when it becomes transferable or is no longer subject to a substantial risk of forfeiture — that is, as it vests, at the value then. An election under § 83(b) instead includes the value at grant, when it is low or zero, so all subsequent appreciation is capital gain.

The election must be filed within thirty days of the transfer. There is no extension, no relief, and no cure. A manager who misses it converts what should have been capital gain into ordinary income realized over the vesting period, on value they cannot access.

For profits interests, a protective § 83(b) election is standard practice even though a properly structured profits interest has no value at grant, because the cost of filing is nothing and the cost of being wrong about valuation is enormous.

Section 409A. 26 U.S.C. § 409a governs nonqualified deferred compensation and imposes, on failure, immediate income inclusion plus an additional twenty percent tax plus a premium interest charge — on the employee, not the company. It reaches phantom equity, cash-settled appreciation rights, discounted options, severance arrangements that are not exempt, and any promise to pay in a later year. Options granted with an exercise price below fair market value are deferred compensation, which is why a defensible valuation at grant matters.

Section 280G — the parachute rules. For a corporation that is not publicly traded, 26 U.S.C. § 280G disallows a deduction for excess parachute payments and 26 U.S.C. § 4999 imposes a twenty percent excise tax on the recipient, where change-of-control payments to a disqualified individual equal or exceed three times the individual's base amount.

The private company shareholder approval exception is the escape, and it is procedurally demanding: full disclosure to shareholders of all material facts concerning the payments, a vote of more than seventy-five percent of the voting power entitled to vote (excluding shares held by disqualified individuals), and the individual's waiver of the payments absent approval. The vote must occur before the change of control, which means the analysis must be run weeks earlier — and it routinely is not.

Section 1061 and the carried interest holding period. 26 U.S.C. § 1061 imposes a three-year holding period for long-term capital gain treatment on gain attributable to an applicable partnership interest held in connection with the performance of services. Profits interests held by management can be caught, which changes the after-tax analysis of an exit at year two and a half.

Leaver provisions: where the value actually goes

Everything above concerns what management receives. The leaver provisions determine whether they keep it, and they are the most consequential and least understood terms in the package.

The basic architecture. On termination of employment, the company (or the sponsor) has a call right to repurchase the manager's equity — both rollover equity and vested incentive equity — at a price that depends on the reason for departure.

The categories.

Bad leaver. Termination for cause, or resignation in breach of a restrictive covenant. Typically: unvested equity forfeited and vested equity repurchased at the lower of cost and fair market value. For incentive equity with no cost basis, that means zero.

Good leaver. Death, disability, termination without cause, resignation for good reason, sometimes retirement. Typically: unvested equity forfeited (or partially accelerated); vested equity repurchased at fair market value.

Voluntary resignation without good reason. The contested middle. Sponsors often treat it as a bad leaver, or apply a discount, or apply a time-based cliff (bad leaver before year three, good leaver after). This is negotiable and it is frequently not negotiated.

Why the definitions matter more than the percentages.

"Cause" defined broadly — to include poor performance, failure to meet objectives, or violation of any company policy — makes every manager a potential bad leaver at the sponsor's option. Cause should be defined narrowly: conviction of a felony, fraud, willful misconduct materially injuring the company, or uncured material breach of a written agreement after notice and a cure period, determined by the board with the manager given an opportunity to be heard.

"Good reason" defined narrowly, or omitted, means a manager who is stripped of duties, relocated, or given a pay cut must either accept it or resign as a voluntary leaver and lose value. Good reason should include material diminution of duties, title, or authority; material reduction in compensation; relocation beyond a stated distance; and material breach by the company — each with notice, a cure period, and a resignation window.

The valuation question. "Fair market value" determined by whom? A board determination is the sponsor's preference; an independent appraisal is management's; a formula (a multiple of trailing EBITDA, less debt) is predictable and can be badly wrong. Whatever the method, the mechanism should be specified, and management should insist on at least a right to challenge a board determination through an independent valuation with cost-shifting.

Payment terms. Cash at closing, or a promissory note over two to three years, or deferred until the sponsor's exit. Sponsors frequently want the repurchase deferred or noted, because paying cash for a departing manager's equity uses capital the company would rather deploy. Management should negotiate for cash where possible, and where a note is unavoidable, for market interest, security, and acceleration on a change of control.

And a Delaware caution. Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) upheld a company's exercise of an express contractual right to redeem retired employees' shares at book value shortly before a transaction that would have made them far more valuable, holding that the implied covenant of good faith and fair dealing could not be used to override an express contractual right the parties had bargained for. The lesson is unambiguous: the redemption terms you sign are the redemption terms you get. There is no doctrine of fairness waiting to rescue a manager from a call right exercised on its terms.

Transfer restrictions, drag, and tag

Transfer restrictions. Management equity is generally non-transferable except for estate planning transfers to permitted transferees, and subject to rights of first refusal. This is normal and appropriate.

Drag-along. The sponsor can compel management to sell on the same terms in a sale it approves. Universal, and the protections to negotiate are: the same form and per-security amount of consideration as the sponsor receives; no obligation to give representations beyond title, authority, and no conflicts; several rather than joint liability for indemnification; a cap on indemnity exposure at the proceeds actually received; and no new restrictive covenants imposed as a condition of the drag.

That last point is worth emphasizing. A drag-along that requires management to sign a five-year non-compete with the buyer, as a condition of a sale management cannot prevent, is a real and frequently accepted imposition.

Tag-along. If the sponsor sells, management may participate pro rata on the same terms. Confirm it applies to partial sales and to sales to affiliates, and that it covers incentive equity as well as rollover equity.

Preemptive rights. The right to participate in future issuances to avoid dilution. Sponsors often exclude management, which means every follow-on financing dilutes the team. At minimum, negotiate anti-dilution protection for the incentive pool — an obligation to increase the pool so the intended percentage is maintained.

Information rights. Annual and quarterly financial statements at a minimum, and an annual valuation of the equity. Managers frequently hold equity for years with no idea what it is worth, and no ability to plan around it.

The employment agreement

Negotiated at the same time, by the same people, with the same counterparty — and it should be read together with the equity documents because the definitions interlock.

Term and termination. Fixed term with renewal, or at-will with severance. The "cause" and "good reason" definitions here must match the equity documents exactly, or a manager can be a good leaver under one and a bad leaver under the other.

Compensation. Base, target bonus, bonus metrics and who sets them, and whether the bonus is discretionary. A discretionary bonus in a sponsor-owned company is a bonus the sponsor may decide not to pay.

Severance. Multiple of base and bonus, benefit continuation, and — critically — the interaction with the leaver provisions. A termination without cause should trigger both severance and good leaver treatment.

Restrictive covenants. Non-compete duration and scope, non-solicitation of employees and customers, confidentiality, and assignment of inventions. Enforceability varies enormously by state, and several states now restrict or prohibit employee non-competes. The covenant given in connection with the sale of a business is treated more favorably than one given in an employment agreement in most jurisdictions, which is why sponsors often place them in the purchase agreement rather than the employment agreement.

Indemnification and D&O coverage. Managers who serve as directors or officers need charter and bylaw indemnification, an indemnification agreement, and confirmation of D&O coverage including a tail on exit.

The forfeiture linkage. Many packages provide that a breach of a restrictive covenant converts a good leaver into a bad leaver retroactively, with a clawback of amounts already paid. Negotiate the trigger to require a material breach, determined after notice and an opportunity to cure, and confine the clawback to a defined period.

Worked example: Tomasz Bregović sells and stays

Tomasz Bregović founded Meridian Thermal, a maker of industrial heat exchangers, twenty-two years ago. He owns sixty-two percent; four other executives own eleven percent between them; a former partner's estate holds the rest. A sponsor, Calder Ridge Partners, agrees to buy the company at an enterprise value of two hundred forty million.

Tomasz's headline outcome. His equity is worth roughly one hundred thirty million before tax. Calder Ridge asks him to roll thirty percent — thirty-nine million — into the new holding company, and offers him five percent of a twelve percent management incentive pool.

The first question his own lawyer asks: into what?

The initial structure has Calder Ridge investing eighty million in preferred units carrying an eight percent compounding preferred return and a full liquidation preference, and Tomasz rolling into common. His lawyer runs three exit scenarios at year five.

Exit at 240 million (flat). Debt repaid; Calder Ridge's preference plus accrued return consumes roughly one hundred eighteen million; the common receives nothing. Tomasz's thirty-nine million is gone.

Exit at 360 million. Preference satisfied; common receives a meaningful amount; Tomasz's rollover roughly doubles.

Exit at 480 million. Strong outcome for everyone.

The renegotiation. Tomasz rolls into the same units Calder Ridge holds, at the same per-unit price, with the preferred return and preference applying to his rolled capital as well. He gives up some upside leverage in the strong case and eliminates the wipeout in the flat case. This single change is worth more than every other term he negotiates combined.

Structure and tax. The acquisition vehicle is a Delaware LLC taxed as a partnership, so his rollover contribution is non-recognition under 26 U.S.C. § 721 and he pays tax only on the cash portion. Had the vehicle been a corporation, the § 351 control requirement would have had to be satisfied, and a failure would have taxed him on thirty-nine million he did not receive in cash.

The incentive pool. Twelve percent, granted as profits interests with a threshold set at the transaction value. Tomasz receives five percent of the company; the four other executives receive four percent between them; three percent is reserved for future hires. He files a protective election under 26 U.S.C. § 83(b) within thirty days — a form that costs nothing and, if forgotten, would have converted his entire appreciation into ordinary income.

Vesting. Half time-vests over five years; half performance-vests, with linear interpolation between a 2.0x and a 3.0x multiple of Calder Ridge's invested capital. His lawyer negotiates three things into the performance half:

Interim distributions count toward the multiple, so a dividend recapitalization does not reset the clock.
Follow-on sponsor capital for add-on acquisitions is added to invested capital only at cost, and the resulting EBITDA counts — so the add-on strategy does not move the hurdle away from him.
Linear interpolation rather than cliffs at each level.

280G. Meridian is a private corporation for these purposes at the time of the transaction, and Tomasz's change-of-control payments — accelerated bonus, severance protection, and equity acceleration — exceed three times his base amount. Section 280G would disallow the deduction and § 4999 would impose a twenty percent excise tax on him. The shareholder approval exception is run: full disclosure, a waiver, and a vote of more than seventy-five percent of the voting power excluding disqualified individuals, completed eleven days before closing. It nearly did not happen — nobody raised it until five weeks out, and the analysis and vote mechanics take longer than that in most deals.

Leaver provisions. The first draft defines cause to include "failure to meet performance objectives established by the Board" and has no good reason definition at all. As drafted, Calder Ridge could set an objective, declare it missed, terminate Tomasz for cause, and repurchase his thirty-nine million of rollover equity at the lower of cost and fair market value. After Nemec, no implied covenant would save him from a clause he signed.

What he negotiates. Cause narrowed to felony conviction, fraud, willful misconduct materially injurious to the company, and uncured material breach after notice — with a board determination requiring him to be given an opportunity to be heard. A full good reason definition covering diminution of duties, compensation reduction, and relocation, with notice, cure, and a resignation window. And, crucially, rollover equity excluded from the bad leaver discount entirely — because he paid for it with his own money, and it is not compensation.

That last point is the argument that wins. Rollover equity is purchased with after-tax proceeds; incentive equity is granted for services. Treating them identically on a bad leaver departure is a conflation the sponsor will usually concede once it is named.

Valuation on repurchase. Board determination, subject to Tomasz's right to require an independent appraisal, with the cost borne by the company if the appraisal exceeds the board's figure by more than ten percent.

Payment. Cash at closing for good leaver repurchases up to a stated amount; a three-year note bearing market interest above it, accelerating on a change of control.

Drag-along. Same consideration as Calder Ridge; representations limited to title, authority, and no conflicts; several liability capped at proceeds received; and no obligation to enter into any new restrictive covenant with a buyer.

Where he ended up. Ninety-one million in cash, thirty-nine million rolled on the sponsor's own terms, five percent of a twelve percent pool with defensible vesting, an employment agreement whose definitions match the equity documents, and a leaver structure that cannot be triggered on a pretext. The negotiation took nine days of his lawyer's time and it moved tens of millions of dollars of expected value.

Securities law and disclosure

The equity granted to management is a security, and the grant is an offering.

The exemptions. Rule 701 under Regulation D's neighboring provisions, 17 C.F.R. Part 230, exempts offers and sales of securities under written compensatory benefit plans by non-reporting issuers, subject to volume limits and — above a stated aggregate sales threshold in a twelve-month period — an obligation to deliver financial statements and risk factors to participants. The private offering exemption of 15 U.S.C. § 77d(a)(2) and Rule 506 are alternatives, particularly for the rollover, where the participants are accredited.

State blue sky. Notice filings and exemptions vary; the compensatory plan exemption is common but not universal.

Antifraud applies regardless. Whatever exemption is used, the antifraud provisions reach the disclosure made to management. A sponsor that presents an aggressive projection as a basis for a rollover decision, or that omits material facts about the capital structure, has made a statement in connection with the purchase of a security.

Which raises a point managers should hear plainly. The sponsor's model, the base case, and the projected returns shown in the rollover discussion are not promises, are usually accompanied by disclaimers, and are prepared by people whose interest is in the manager rolling. Model it yourself, at three exit values, using your own assumptions.

The exit

Everything is designed for this moment, and several provisions only become real here.

Sale of the company. Drag-along compels participation. Performance awards vest to the extent hurdles are met by the transaction. Time awards accelerate under the agreed trigger. Rollover equity participates according to its class — which is why the class question was the most important one at the beginning.

Second rollover. A common outcome: the buyer is another sponsor, and management is asked to roll again. The same analysis runs again, and management is now more experienced and usually better advised.

Dividend recapitalization. The company borrows and distributes to equity holders. Management's rollover equity participates; incentive equity may or may not, depending on whether the pool participates in distributions before an exit. Whether the recap counts toward performance vesting hurdles should have been settled at grant, and if it was not, it will be argued about now.

Initial public offering. Incentive awards convert into public company equity, subject to lock-ups and the registration mechanics. Profits interests require a conversion analysis that is genuinely complicated and should be modeled before an IPO is contemplated, not during.

Bankruptcy or a bad outcome. Rollover equity in a leveraged company is the most junior claim in the structure. It goes to zero first. A manager who rolled fifty percent of their proceeds and holds common behind a large preference and a large debt stack has, in a bad case, converted a life-changing liquidity event into nothing. This possibility should be stated in plain language before the rollover is agreed, not discovered afterward.

Tax at exit. Capital gain on rollover equity held long enough. Capital gain on properly structured profits interests, subject to the three-year holding period of 26 U.S.C. § 1061. Ordinary income on non-qualified option spreads and on phantom equity payments. The after-tax difference between the best and worst structures on the same economics is very large, and it was determined years earlier by decisions that took an afternoon.

What the sponsor is thinking

Understanding the other side shortens the negotiation.

Alignment is genuine, not rhetorical. A sponsor wants management to have enough at risk that a bad outcome hurts, and enough upside that a great outcome is life-changing. The rollover percentage and the pool size are both set with that in mind.

Retention is the point of vesting and of leaver provisions. A five-year vest and a bad leaver forfeiture are not traps; they are the mechanism by which the sponsor buys the team's continued presence.

But sponsors also want optionality. A broad cause definition, a call right at low value, and a deferred payment obligation all preserve flexibility, and a sponsor will take them if offered.

Sponsors are highly experienced and management is usually not. The sponsor has done fifty of these; the manager is doing one, possibly the only one of their life. That asymmetry is the reason separate counsel matters, and it is why an experienced management-side lawyer will identify in an afternoon issues the team would never have seen.

Sponsors will negotiate. The terms that seem non-negotiable — the cause definition, the good reason definition, the treatment of rollover equity on departure, the interpolation of performance vesting — are conceded routinely when raised early and framed as market. They are not conceded when raised in the last week.

Conflicts, process, and who represents whom

The manager who negotiates the deal is also selling into it. A CEO who is a director, a selling stockholder, a rollover investor, and a prospective incentive equity holder is conflicted in four directions, and the company's other stockholders are entitled to a process that accounts for it.

What Trados teaches. Directors with management incentive awards approved a sale that paid the preferred and the incentive plan and left the common with nothing. The court found the directors interested and the process deficient — the board never considered the common stockholders' interests, never formed a special committee, and never obtained independent advice. Liability was avoided only because the common stock turned out to be worthless anyway. The process failure was real; the damages were not.

The process fixes are conventional. A special committee of disinterested directors where management is on both sides. Independent financial and legal advice for the committee. A record showing the interests of each constituency were considered. Disclosure of the management arrangements — the rollover, the pool, the employment terms — to the other stockholders, in enough detail that they can evaluate the incentive.

Timing of the management package. Sponsors often want to lock management up early; other stockholders benefit from management negotiating price before negotiating its own package. The cleaner sequence is price first, management terms second, and where that is impractical, disclose the management terms fully to whoever is approving the transaction.

And on representation. Company counsel represents the company. The sponsor's counsel represents the sponsor. A management team without its own counsel is negotiating a life-changing set of documents with no one on its side, and the cost of separate counsel is trivial relative to the value at stake. Sponsors expect it, and a sponsor that objects to management having its own lawyer has told you something.

Common failure modes

Agreeing the rollover percentage before the rollover instrument. The class matters more than the number, and once the percentage is agreed the leverage to change the class is gone.

Missing the 83(b) deadline. Thirty days, no relief, and the consequence is that appreciation becomes ordinary income realized on paper the manager cannot sell.

Discovering 280G five weeks before closing. The vote mechanics, the waivers, and the disclosure take longer than that.

Accepting a cause definition that includes performance. It converts every award into a discretionary one.

Accepting no good reason definition. It means constructive termination costs the manager everything.

Treating rollover equity like incentive equity on departure. They are different in kind and should be treated differently.

Ignoring the pool's dilution. A ten percent pool with no anti-dilution protection is not ten percent after two add-on acquisitions funded with sponsor equity.

Performance hurdles measured on realization only. A dividend recapitalization delivers return to the sponsor and nothing to the vesting schedule.

Follow-on capital added to invested capital at a step-up. It moves the hurdle away from management every time the sponsor invests.

Cliff vesting at each performance level. It creates an incentive to hold for a marginal improvement and it produces the worst arguments at exit.

No valuation mechanism for repurchase. "Fair market value as determined by the Board" with no challenge right is a price set by the buyer.

Definitions that do not match across documents. A good leaver under the employment agreement and a bad leaver under the equity plan is a real and common drafting failure.

Relying on the implied covenant. Nemec forecloses it where the contract is express.

No separate counsel. Everything above follows from this one.

Practice pointers

Ask "into what?" before "how much?" Rolling into the sponsor's own instrument at the sponsor's price is worth more than any other single term. Model three exit values before agreeing.

Confirm the rollover is non-recognition under 26 U.S.C. § 721 or § 351 before it is documented. A taxable rollover generates tax on cash the manager never received.

File the 83(b) election within thirty days. Set a calendar reminder the day of grant. There is no relief for missing it.

Run the 280G analysis six weeks out. The shareholder approval exception requires disclosure, a waiver, and a supermajority vote before closing, and the mechanics take longer than anyone expects.

Narrow "cause" and insist on a real "good reason." These two definitions determine whether the sponsor can convert a departure into a forfeiture at will.

Exclude rollover equity from bad leaver discounts. It was purchased with after-tax money; it is not compensation. This argument usually succeeds once it is made.

Match the definitions across documents. The equity documents and the employment agreement must use identical "cause," "good reason," and "change of control" definitions.

Negotiate the performance vesting mechanics, not just the hurdles: interim distributions count; follow-on capital added at cost; linear interpolation; and vesting to the extent hurdles are met by the exit itself.

Get information rights and an annual valuation. Holding an illiquid position for six years with no idea what it is worth is a bad position to be in.

Cap drag-along obligations: same consideration, limited representations, several liability, indemnity capped at proceeds, and no new restrictive covenants imposed as a condition of a sale you cannot prevent.

Remember Nemec. The repurchase terms you sign are the repurchase terms you get, and no implied covenant will improve them.

Get separate counsel, early. Nine days of specialist time can move tens of millions of dollars, and it only works if the engagement starts before the term sheet is signed.