An EMEA-focused venture capital firm established to invest in early-stage technology companies and with commitments from a variety of institutional limited partners, engaged 3 junior investment professionals. Prior to this time of engagement, the fund’s General Partner (GP) team included 3 senior partners. Initially, carried interest (20% of the fund’s profits) was distributed equally among the senior partners, with no allocation to junior team members. Over time, it was determined that 2 of the junior professionals had made significant contributions to the GP team. Additionally, one senior partner played a lesser role than expected due to other commitments, thereby creating tensions within the senior members about the fairness of the existing compensation arrangements.
The Challenge
The existing cary arrangements failed to (a) adequately incentivise junior team members in such a way as to encourage long term commitments from them, despite their growing contributions; (b) reflect actual contributions of senior partners, especially those who were less active and did not create the requisite degree of alignment across the team, risking attrition of key contributors.
Approach & Outcome
With the approval of the senior partners, we interviewed senior partners and junior partners separately. We then reviewed and updated the existing carry arrangements with a view to adjusting the existing carried interest allocation. Amongst others, the modified carry arrangement featured a base allocation of 50% carry, allocated equally among the three senior partners, reflecting their founding contributions and leadership roles (b) a base allocation equal to 30% of the carry distributed among all team members (senior and junior) based on their contributions to key metrics, such as, deal sourcing, portfolio management and exit execution. Contributions were to be tracked and evaluated annually by an internal review committee; (c) a discretionary pool of 20% of the carry, held by the fund’s managing partner and allocated on a discretionary basis to reward exceptional performance, attract new talent, or retain key team members. We also introduced vesting terms allowing senior partners to retain immediate vesting for their base allocation, whilst junior team members were subject to a 3-year vesting period, with a 1-year cliff, ensuring alignment with the fund’s long-term goals.
Key Takeaways
We were able to help the client to implement a framework for retaining key talent, improving performance, entrenching, attracting new talent and aligning the value of fairness and transparency, a key value of the client firm. The client was able to align incentives, foster collaboration, and drive performance, ultimately benefiting both the fund and its investors. This highlights the importance of addressing evolving team dynamics and contributions within an investment fund.
This publication is not intended to provide legal advice and is not prepared with a specific client in mind. Kindly seek professional advice specific to your situation. You may also reach out to your usual Balogun Harold contact or contact us via support@balogunharold.com for support.
