Kleinberg Kaplan assists hedge fund founders in increasing and preserving the franchise value of their management companies through comprehensive continuity planning. Continuity planning can provide investors and employees with confidence that the firm will survive the departure of its founder(s) and provide for a greater alignment of interests with investors.
Continuity planning is a multi-year process that is most successful when developed long before the founder is considering leaving the firm. An initial component of continuity planning is implementing management and risk committees so that senior employees can participate in the governance of the firm. At the appropriate times, the founder(s) should consider granting equity or phantom equity to key employees in exchange for their making long-term commitments to the firm. Our team advises clients on structuring such equity arrangements, including implementing vesting terms, lock-ins, claw backs, and restrictive covenants. We assist clients with other elements that lay the foundation for a continuity plan such as creating an institutional framework, exposing key employees to investors and developing fund terms that further such plans (e.g., investor level gates, key man provisions and modified high-water marks).
We assist clients in structuring equity grants to the potential successors, including: developing a succession plan with sufficient flexibility for the firm/founders to adapt to changes in the market and changes in the respective capabilities of employees; providing advice regarding how much equity and control should be granted to the successors and retained by the founders; determining if additional restrictive covenants should be imposed upon the successors; developing buy-out terms if a successors departs prior to the retirement of the founders; and establishing mechanisms to protect the return on the founders’ equity after departure. In structuring these types of equity grants, we analyze issues in connection with the Investment Advisers Act, investor disclosure obligations and fund documentation.