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How to negotiate a partner role at a VC or private equity firm (or recruit a Partner)

This is part of a series on building your career in venture capital:

It’s hard enough to get a job at a venture capital or private equity firm; it’s even more complex to join as a Partner.  I thought it would be helpful to put together some notes on market norms and issues to consider in negotiating a partnership at an institutional investment firm.  These are many of the steps I went through when I joined HOF Capital as a Managing Partner and ff Venture Capital as a Partner. I’ve also been involved in recruiting new Partners into certain VC firms, and used the same systematic approach to finding my wife.

My focus here is people joining at a senior level. For resources for pre-Partner people, see the essays above.

If you join a fund, you’ll invest your financial capital, but far more importantly, your reputational capital. VC and private equity are very illiquid on both the investing and the personnel side, so assessing fit is critical. 

As you assess the opportunity, I suggest there are three variables which drive the economic analysis: NPV * S* I, where:

  • NPV=what is the NPV of all future cash flows from the opportunity
  • S=What are the odds of success of this organization hitting escape velocity? With a startup fund, no one can offer high-confidence predictions of future cash flows. I think you can more realistically assess the odds that the organization raises a fund III, which is a crude heuristic for the firm becoming institutional
  • Y=your share of the pie. This is the least important variable, because it change over time, and a large share of a small pie is worth very little.

I break the fit assessment process into 8 domains: 

  • Team: Who’s there, and how do you fit in? Why do they want you? It’s likely to address a weakness they have.
  • Investment Strategy: What do you believe that others think is heresy or wrong?  What is your unique competitive advantage?
  • Control: voting/veto for new deals, share of management company
  • Compensation: base salary, share of profits of management company, carry
  • Community: to existing portfolio, to internal team resources, to LPs
  • Culture: as a Partner, you’ll shape the culture, but inertia is more powerful than you
  • Finance and Operations: you’re only as good as your back office
  • Contract:”You’re never rich enough to afford a cheap lawyer.”

In the negotiation, I suggest optimize for the following:

  • Further empower the firm to execute its proven strategy.
  • Aligned interests.
  • Transparency on company financials and operations, which facilitates efficiency.
  • Egalitarianism. I find that it greatly simplifies partnerships when, as much as possible, people are treated equally, especially if at similar levels. This lowers legal costs, and if in the future you add other staff, it makes it easier to say, “the other senior management have terms X; that’s our corporate standard.”
  • Simplicity. The more complex the agreement, the higher the legal costs and worse, the more room for friction

The first step of course is to look at the fund the same way a limited partner does.  I suggest ask the fund to share their response to an institutional LP due diligence checklist, including their data room.   

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TEAM

What senior turnover have you had in your history? Who joined the firm, why did they leave, and what did you learn as a result?

On what KPIs is each Partner evaluated?

INVESTMENT STRATEGY

If you’re joining the firm, you’ll inevitably impact their investment thesis.  See 33 Questions We Asked Ourselves Before Starting Pace Capital and Alexander Jarvis’s collection of investment theses.

CONTROL

You’re going to make daily decisions with your colleagues on the investments you will jointly make.  For some examples of public transparency on what investors are looking for, see Versatile VC, ffVC, HOF Capital, Brian Laung Aoaeh, IA (Roger Ehrenberg); and Georgian Partners.  To assess this, you’ll want to understand who is on the investment committee, and how voting works.  In any organization there will be disagreements.  This is all the more true inside a VC, often made up of former CEOs.  So any well-managed VC will have an articulated mechanism for making decisions, taking into account input from all parties. 

The modal disagreement inside a VC: Partner X invested in a company, which is now performing below expectations.  X wants to invest more money because she’s on the board, has a closer relationship with the CEO, and failure will reflect poorly on her personally.  The other Partners have lost faith and want to cut their losses.  What should the firm do?

One proxy for understanding voting power is economics.  In theory, carry correlates with decision-making power.  In practice, the Partner with a ‘hot hand’ and recent wins is likely to have disproportionate influence; the same applies to the founding Partner (s). According to the research paper How Do Venture Capitalists Make Decisions?, “Roughly half the funds [surveyed]—particularly smaller funds, healthcare funds and non-California funds—require a unanimous vote of the partners. An additional 27% of funds require consensus (20%) or unanimous vote less one (7%). Finally, 15% of the funds require a majority vote. “ For more on this, see An Inside Look at how Venture Capital Firms Make Decisions.

Bloomberg Beta open-sources their entire operating manual on Github, where their website lives.  The whole document is worth reading, but most relevant is this excerpt:

“We have an “anyone can say yes” policy. Yes, any of our team members can say yes. And no, you don’t have to meet my other partners. We believe the best founders and companies are polarizing. Our best investments might have been, originally, opposed by one or more of our partners. Teams are great at gathering information and surfacing wisdom, but terrible at making decisions. We believe in individual accountability — if anyone can say yes, then everyone feels the weight of making a decision. (That said, we do require that before anyone says yes they mention the investment to the rest of us — that way they get the benefit of the team’s input, and it’s a good way to slow down and think for a second.)”

An opposite extreme: Techcrunch asked Jeff Clavier, Founder of SoftTech VC, “With three full partners, what will the voting structure be at SoftTech? Will your vote carry more weight than your new partners or will two out of three votes get a deal done?”  He said,

“Everyone has to support a deal in order to get it done. There is always a champion with strong conviction advocating for the deal, and he or she leads the due diligence. If and when there is a skeptic, we’ll often have that person participate in the due diligence phase to make sure all questions or doubts are answered. There is obviously respect amongst us as a team, and if one of us really wants to do a deal where he or she has an established track record, others will defer and support – unless the “over my dead body” card is pulled, in which case we pass.”

Control is also an issue over the many non-investment decisions you’ll have to make. I suggest clearly delineate responsibilities against all of the functions of an investment management firm. I suggest in certain areas one Partner is lead; others always have the right to “disagree and commit”. Certain topics typically require unanimity, e.g., adding a new Partner. For reference on how investment management firms design themselves internally, see

COMPENSATION

Mike Margolis, an experienced VC and hedge fund investor, suggest assessing: “Which of the partners at the firm share your skill set and how do you fit in? If you are one of six in the LP relationship area, you will have less leverage than if you are a new hire with the only European LP relationships. Are you bringing a track record which will facilitate marketing?  In assessing your likelihood of success at the firm, think about how the firm has historically created value and how it intends to do so moving forward. What do you bring to this formula? “

As a negotiating point, you’re probably going to want to highlight that numerous top-tier VCs have equal carry in funds, although often unequal ownership at the management company level.  Of course, many funds use a different model, with unequal carry and vesting based on seniority and other factors.

Blue Future Partners, a VC fund of funds, recommends equal carry: See “How to Split the Economics“. Among the VCs who publicly share that they have an equal-carry model are Aleph Partners, Atlas Venture, Benchmark, Charles River Ventures, Eniac, Foundry Group, IA Ventures, Kepha Partners, Madrona Venture Group (in Dan Primack’s Term Sheet, June 6, 2012); Nextview Ventures, and Union Square Ventures . (Each firm name links to a public discussion of their economics.) 

A Harvard Business School study of 717 private equity partnerships by Josh Lerner and Victoria Ivashina examined how “inequality” in the allocation of fund economics between founders and their partners negatively impacted their limited partners:

“We examine 717 private equity partnerships and show that (a) the allocation of fund economics to individual partners is divorced from past success as an investor, being instead critically driven by status as a founder; (b) that the underprovision of carried interest and ownership—and inequality in fund economics more generally—leads to the departures of senior partners; and (c) the departures of senior partners have negative effects on the ability of funds to raise additional capital.”

A recent lawsuit against Oak Capital provides some insight into how that particular firm handles compensation: Fallen VC Ifty Ahmed, under investigation by the SEC, claims former employer Oak Investment Partners owes him tens of millions of dollars.

COMMUNITY

Who controls dialogue with each portfolio company?  With LPs?

Does the firm have a CRM system?  Are all team members required to put all data into it?

CULTURE

I discuss how to assess culture in more depth in Ready to Join a New Management Team? Here’s How to Do Your Due Diligence First.  Ideally, the fund will have a public statement of culture, e.g., Versatile VC, Antler, Interlace Ventures.

FINANCE AND OPERATIONS

Is the firm profitable as a whole? If not, how much capital have the founders committed to spend subsidizing until it hits profitability?

CONTRACT (AND OTHER LEGAL AND STRUCTURAL ISSUES)

How does the Limited Partner Agreement compare with the Institutional Limited Partners Association’s Model Limited Partnership Agreement?

You’re not rich enough to afford a cheap lawyer.  It’s critical you get counsel to review your docs closely.  Dolph Hellman, a fund formation lawyer, wrote a must-read article in Techcrunch on issues to consider in creating a management company.   

When I recently hired an attorney, I asked for referrals, and I got a very assertive advocate, Emily Campbell of The Campbell Firm PLLC.  Emily’s advice, “When a new partner is to enter a pre-existing fund organization, there is usually a well-established dynamic among the existing partners that will necessarily experience readjustment.  How this new partner will be treated in the group goes beyond just the economics.  What initiatives the new partner will be able to take and what decisions the new partner will be able to make in the group context can be informed by subtleties in the documents regarding board positions, outside activities, access to investors, and interactions with LPs and the broader community.  An effective lawyer will assist the client in thinking through more than just compensation and carry, and think about setting up the Partner for success in the long-term relationship formalized when the new partner finally signs.”

Dror Futter, Partner, Rimon Law, points out, “If you are joining an existing partnership, step one is a review of the firm’s fund agreement.   There can be significant variation among fund terms.   These terms will define the economic pie management will divide and many of the obligations and limitation imposed on fund management.  If this is your first time as a fund manager, consult with an experienced professional to identify non-market terms in the partnership agreement.   The presence of non-market terms may reflect difficulties in fundraising or the idiosyncratic demands of one or more LP’s.   “The ‘back-story’ to these terms can give you valuable insight into the strength of the fund.  The sad reality is that a not insignificant portion of funds fail to even return investor’s money and therefore do not raise a successor funds.   Most fund “deaths” are not quick.  Funds continue in a zombie-like state during which they make no new investments and have limited capacity for follow-on investments.  During this period, most fund agreements provide for gradually diminishing management fees.  It is therefore important to understand what the partnership agreement and your employment agreement with the fund state with respect to this fund twilight period.  For example, in some fund agreements, partners are required to devote all or substantially all of their time to the fund.  Understanding when and under what conditions this restrictions are lifted could help you avoid becoming “trapped” in a zombie fund.”

David Sorin, Partner, Global Co-Chair – Technology @ Brown Rudnick LLP, said, “Assessing your value includes many elements, including experience, expertise, track record in identifying and consummating deals with high rates of return, and fundraising, among others.  Of course, compensation is critical, but so is negotiating and documenting your management role (both authority and accountability), including delegated authority and voting power.  With respect to voting power, consider your management role relative to the allocation of authority and voting power generally.”

Among the issues to consider in your negotiation:

  • Overall group budget and budget for your specific areas of responsibility
  • Succession
  • Protection against constructive termination
  • Protection against dilution when adding partners
  • Approval process for new Partners
  • Two-way nondisclosure and nondisparagement
  • Expense policies
  • Key man clause
  • Economics in both the current and future funds
  • Structure & timing of next fund
  • The firm and your capital commitment
  • Share and vesting of Carry
  • Tax distributions
  • Guaranteed compensation/salary/advance from management company
  • Ownership share of management company
  • Membership on investment committee (voting rights, etc.)
  • Policy on outside activities and investments
  • Policy on usurpation of business/investment opportunities
  • Restrictive Covenants (nonsolicitation and noncompete restrictions)
  • Ability to be removed/terminated (cause, without cause) and consequences (effect on vesting, ownership in management company and effect on remaining capital commitment, if any and effect on noncompete)
  • Employee and investor noncompete/nonsolicitation
  • Policy on sharing track record
  • Ownership of the Brand (i.e., name of the Fund)
  • Reimbursement of legal expenses in case of dispute
  • Partnership expenses
  • Ability to resign without cause (notice period and noncompete)”
  • Indemnification and D&O insurance
  • Clawback scenarios
  • Social media policy
  • Personal investments policy

You may also find helpful:

Good luck in finding your dream opportunity!

Thanks to Sean Seton-Rogers, Partner, Profounders Capital; Emily Campbell, Campbell Firm PLLC; Dror Futter, Rimon Law; David Papier, Dentons; and David Sorin for their contributions to the issues checklist above.  

I am not a lawyer and don’t claim to offer any legal advice.  None of the lawyers quoted are responsible for any ideas herein.  This is not to be taken as specific legal advice applicable to particular issues or circumstances. If such advice is required, please contact a lawyer.  Use at your own risk.

(An earlier version of this was cross-posted in VentureBeat.com)

Published on September 2, 2017, Updated on November 19, 2023.
Fund Management, Career, Contributed Articles, HOF Capital, Negotiation, Private Equity, Venture Capital

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