Rollover versus cash at close
A seller can take certain cash now, or reinvest part of it in the sponsor's plan, and pay the tax later.
- Compare a seller's after-tax dollars from all cash and from a rollover
- Value the tax deferral a rollover gives
- Find the exit multiple a rollover needs to beat cash by a margin
- Explain why the sponsor wants the seller to roll
The intuition
You sell your house to a developer. They offer cash for all of it, or cash for most of it plus a share of the flats they will build on the site. The share could be worth far more than the cash you gave up, or less. And if the tax office lets you delay the tax on the part you reinvest, the money that would have gone in tax is working for you too.
A founder selling to a sponsor faces the same choice. Rolling over means reinvesting part of the proceeds into equity in the new deal instead of taking cash. Structured properly, the rolled amount is not taxed until the sponsor exits.
All cash = proceeds × (1 − tax). Rollover = cash kept × (1 − tax) now + rolled × exit multiple × (1 − tax) later. The two are equal at exactly a 1.0x exit; above it rolling wins, below it cash does.
Why it works
- The conventions here: the seller's tax basis is nil, so every dollar of cash is taxed at the stated capital gains rate. A tax-deferred rollover is taxed once, on its exit proceeds. Dollars are compared at exit, undiscounted.
- The comparison reduces to one leg. The cash kept is the same in both paths. Only the rolled part differs: rolled × (1 − tax) in cash today, against rolled × multiple × (1 − tax) at exit.
- Tax deferral is an extra benefit over selling, paying tax and reinvesting the rest. The tax that would have been paid today stays invested and earns the deal's return; the government takes its share at the end, on the bigger pile.
- What the arithmetic leaves out: time, illiquidity, concentration and leverage. The rolled dollars arrive years later from a levered company and cannot be sold in between.
- Why the sponsor wants it: a founder who rolls signals belief in the plan, stays aligned, and every dollar rolled is a dollar of equity the sponsor does not have to fund.
- The terms of the rolled shares matter as much as the multiple: tag-along rights, information rights, and a say over dividend recaps.
| All cash: 200 × 80% | 160 |
| Rollover, cash now: 140 × 80% | 112 |
| Rollover, at exit: 60 × 2.5 × 80% | 120 |
| Rollover total: 112 + 120 | 232, so 72 more than cash |
| Sell, pay tax, reinvest: 48 × (1 + 1.5 × 80%) | 105.6, so deferral is worth 14.4 |
| Multiple to beat cash by 20%: 1 + 32 ÷ 48 | 1.67x |
The formulas
Taxed once, today.
Cash kept now, plus the rolled stake at exit.
Only the rolled leg differs.
Taxed now, and the gain taxed again at exit.
Run the comparison backwards.
Worked example
Tax the cash path once. For the rollover, tax the cash kept now and the rolled stake at exit.
See it move
Same founder and the same sale. Change how much is rolled, the tax rate, what the deal returns and the margin the founder wants over cash.
- Raise the exit multiple. The rollover total rises and all cash does not; they are equal at exactly 1.0x.
- Roll more. The gap between rolling and cash widens, in whichever direction it points, and the multiple needed for the margin falls.
- Raise the tax rate. Both paths fall, but the multiple needed for the margin does not move.
- Raise the margin wanted. The multiple needed rises.
Run it backwards
Same founder, reversed: rolling must leave them a set percentage better off than all cash. What exit multiple does that need?
The gain over cash comes only from the rolled leg: rolled × (1 − tax) × (multiple − 1). Set that equal to the gain wanted and solve for the multiple.
Written as a margin on the all-cash amount, the tax rate cancels: the multiple needed is 1 + margin ÷ share rolled. Rolling 30% for a 20% margin needs 1.67x whatever the tax rate.
Traps
Say it in the interview
“A founder is deciding whether to roll equity into a sponsor's deal. How would you advise them?”
Check yourself
4 fresh questions, with new numbers. Answer each one correctly to finish the chapter. Get one wrong and you will see the full working, then you can try it again with new numbers.
Answers within 1% are marked right. Type the number; $, %, x and M are fine. First tries count toward Learned: the topic is Learned once every chapter is done and 75% of first tries were right.
- All cash = proceeds × (1 − t).
- Rollover minus cash = rolled × (1 − t) × (multiple − 1): equal at 1.0x.
- Deferral keeps today's tax invested until exit.
- Multiple for a margin = 1 + margin ÷ share rolled.