This page is for the founder of an established company in Miami or South Florida who has been approached by a private equity firm, or is weighing outside capital, and has to decide what kind of transaction to discuss. Whether to sell at all is covered in sell or scale. Here the question is how much of the company to sell and what each choice changes for you.
What are the ways to sell part or all of a company to private equity?
A minority investment brings in an investor without a controlling stake. The founder can keep control, though the voting rights and governance terms decide who controls what, so have your attorney explain how they allocate authority. The money can go into the company to fund a plan, or to owners who sell some of their shares. Ask which purpose the proposal serves, since many do both.
In a majority sale with rollover, the investor generally acquires control and the founder keeps or receives equity as part of the deal, in the company itself or in the buyer's holding company. Ask your attorney which entity you will own and what rights come with it. The founder often stays involved. The rolled equity stays at risk after closing: what it returns, and when, depends on the company's results and the terms attached to it, and a later sale does not guarantee a payout.
A full sale, as this page uses the term, means the founder leaves ownership with no retained or rollover equity. Ask your attorney whether the buyer is purchasing the company's shares or its assets. Payment terms and any agreed role after closing can still tie the founder to the company for a period.
The SEC's Investor.gov guide to private equity funds describes a typical strategy as taking a controlling interest in an operating company and engaging actively in its management and direction. It also notes that other funds make minority investments in fast-growing companies. Ask an investor which kind of investment its fund makes before you discuss structure.
What does each option change for the founder?
Use this comparison to see what each proposal needs to say in writing. The cells describe common arrangements, and your attorney confirms what the documents provide.
| For the founder | Minority investment | Majority sale with rollover | Full sale |
|---|---|---|---|
| Control of decisions | Founder can keep control, subject to the voting and consent terms | The investor generally controls the company, and the founder's authority is what the documents give | The new owner controls the company |
| Money to the founder now | If the deal includes buying the founder's shares or another agreed payment to the founder | Proceeds for the shares sold, with the rolled part reinvested | Proceeds subject to the payment terms |
| Money left in the company | The new capital, if the proposal puts money into the business | What the new owner commits to the plan, shown apart from seller proceeds | Whatever the new owner decides to fund |
| The founder's role | Unchanged on paper, with an investor to report to | Usually continuing, under terms negotiated separately | Any role set in the deal documents or a separate transition agreement |
| Who decides the next sale | The founder, within any exit rights the investor holds | Generally the investor, subject to the documents and any required approvals | The new owner |
| What the founder owns afterward | Retained equity, with control set by the voting and governance terms | Rollover equity that stays at risk until it is sold or pays out | No equity in the business sold |
| What to settle in writing | Consent rights, the use of the money and how the investor will exit | Your role and authority, and the rights attached to the rolled stake | Payment conditions and the length of any transition |
Keep two figures apart in every proposal: the money paid to owners and the money that stays in the company to fund its plan. Ask your adviser to show both for each offer. A large payment to sellers can leave the business with less to grow on.
When does a minority investment fit?
A minority investment fits a founder who wants to keep directing the business and has a specific use for outside money, such as an expansion or an acquisition. It can also give the founder some personal cash if the investor buys part of the founder's shares. Write down what you need personally and what the company needs before you meet investors, because the two answers lead to different proposals.
Keeping control still means asking for consent on the decisions the investor's rights cover. Picture the first time the investor disagrees with a call you have always made alone. Before signing, ask the investor which decisions would need its approval.
Every minority investor also needs a way out of its stake. A founder who wants to own the company indefinitely and an investor seeking an exit can want different things, so ask how the proposed terms deal with that difference. A minority investment can also fund the purchase of a departing partner's shares, which we cover in buying out a business partner.
When does a majority sale with rollover fit?
A majority sale fits a founder who wants much of the company's value in cash now and is ready to work for an owner who has the final word. Through the rolled stake, the founder keeps a share of the company's next stage.
Treat the rolled stake as a new investment. Ask whether you would put that money into this company, under this owner and its plan, if a stranger offered you the chance. Knowing the business well does not tell you what the stake will be worth at the next sale.
Ask your adviser to show what the stake would return under a weak outcome for the business and a strong one. Ask your attorney whether other investors are paid before you and how future equity issues could dilute your stake. Have them explain any right the company holds to buy back your equity if your employment ends. Your tax adviser should assess the tax treatment of the rollover.
Discuss your role before signing a letter of intent, and ask your attorney which terms belong in the letter and which wait for the final agreements. A rolled stake makes you an owner and leaves your authority and pay to be settled separately, which our guide to staying on after selling covers.
When does a full sale fit?
A full sale fits a founder who wants to stop being an owner and would prefer not to wait on a later sale for part of the proceeds. It also ends any share in the company's later growth. Ask yourself how you would feel if the company sold again for more a few years later, and settle that before you sign.
Selling every share still leaves terms to settle. Payment can arrive in stages, and the buyer may ask you to stay for a transition. Your adviser can show what you receive at closing and what depends on conditions afterward.
What rights can a minority investor ask for?
A minority investor's rights are negotiated, and they can include the following. Have your own attorney explain the scope of each one.
- Consent rights. The investor's approval before the company takes defined actions, such as new borrowing or a large acquisition.
- Board or observer seats. A seat on the board, or the right to attend board meetings without a vote. Our page on advisory boards and boards of directors covers what a board does.
- Information rights. The reports and figures the company must send the investor, and how often.
- Exit rights. Provisions that can let the investor require other owners to join a sale, join a sale another owner makes, or seek a way to cash out under set conditions. Ask your attorney which apply and whether you could be required to sell.
Ask your attorney to translate each consent right into a decision you would recognize from last year. Then judge whether you could have run the company the way you did under those limits.
What happens at the next sale?
Once a private equity firm owns part of the company, its plan for the investment shapes when and how the company is sold again. Ask how and when it expects to exit, and what say you would have in that decision. If you keep equity, a later sale or a distribution is how it can turn into cash, on the terms attached to it. Our guide to exit readiness with a private equity backer covers what changes for the founder in that second sale.
What should you ask the investor before signing a letter of intent?
Ask for answers you can check against the proposal. A general promise to back founders leaves too much open.
- What is your plan for this company, and what would you change in the first year?
- How and when do you expect to exit, and what would change that?
- Which decisions would need your consent, and how are disagreements settled?
- What do you expect from me after closing, and who judges whether I am meeting it?
- How much of the money reaches the sellers, and how much stays in the company?
- What did you do in a company whose results fell short of plan?
- Can I speak to founders you backed, including one where the investment went badly?
Call those founders and ask how disagreements were handled and whether the investor kept its word. Before signing, write down the terms that would make you walk away if they changed between the letter of intent and the final documents, and have your attorney review the letter itself. If you want an adviser to compare offers or run a process, our guide to choosing a business broker or M&A adviser covers that choice.
How does dependence on the founder affect each option?
Dependence on the founder shapes what each proposal asks of you after closing, and what an investor will pay for. Carlos's own line from his banking years states the stakes: "Your valuation scales only when your absence doesn't threaten the business." Compare the responsibilities you would keep under each proposal. Our exit readiness guide covers how to reduce them.
What should a founder do this quarter?
- Write down what you want to keep. List the decisions you want to keep making and the responsibilities you want to hand over.
- Separate the two kinds of money. Set what you want personally apart from what the company needs, and ask your adviser to show how each proposal covers both.
- Get the investor's terms in writing. Ask each investor for its consent rights and exit plan on paper, and call the founders it backed.
- Review before the letter of intent. Take the open terms to your attorney and tax adviser before you sign anything.
- A minority investment can keep you in control, depending on the rights the investor negotiates.
- A majority sale with rollover can pay you at closing while the retained equity stays exposed to future losses.
- A full sale ends your ownership, while payment terms and any transition can still tie you to the company.
- Keep the money paid to owners apart from the money that stays in the company.
- Discuss decision rights and the investor's exit plans before a letter of intent, and have your attorney list the open terms, your role included.
The Leadership Scorecard takes ten minutes and shows which parts of the company still depend on you, which is the first thing any investor will ask about.