Many emerging fund managers find that large anchor investors request economics in their general partnership or management company. To help guide that negotiation, here’s a template of an opening letter to a potential anchor investor, laying out all your deal structuring options. You may find helpful a piece from Techcrunch on Should you give an Anchor investor a stake in your fund’s management company?, which provides some indicative benchmarks.
Note this can get very complex. Competent counsel is critical.
Dear potential anchor investor,
As we discussed, I prepared a rough outline of a proposed partnership between us.
We see several different “currencies” with which we can compensate you for writing us a material check, and by which you can help us launch. Note that in some of the structures below, the Anchor has a financial incentive to help the Startup GP in raising assets.
Anchor Investor currency choices:
- Anchor invests $__ into Startup GP Fund I. This is my preferred currency, because dollars invested as an LP create more credibility with other LPs than dollars invested into the GP.
- Anchor advances a $__ loan to the Startup GP management company at a __% interest rate.
- Anchor makes an investment of $__ into the Startup GP Fund I management company, to pay for organizational expenses.
- Assistance in business development, marketing, capital intro.
- Back office support.
Startup Emerging Manager currency choices:
- “Most favored nation status”-same preferential rights if any as other LPs of same size.
- Right to make investments in this and subsequent funds.
- For an investment of over $__, we’d entertain a reduction in carry fees.
- For sourcing deals, we can pay you the same standard economics we use with our Scouts/Venture Partners. (See How to Find a Job as a VC Scout: Compensation and Which Firms Are Recruiting for benchmarks.)
- For fundraising, we pay __% of assets raised from limited partners sourced by Anchor, which is the standard structure I’ve used with past placement agents. We’d need to check with counsel to see if we can use this incentive structure for Anchor, if Anchor is not a broker-dealer. Note that with this structure, there’s a risk of friction over who is considered an LP ‘sourced’ by Anchor.
- A seat on the Limited Partner Advisory Committee. This advises on conflicts of interest and other matters.
- Give Anchor an [observer/voting] seat on the Investment Committee. (Note that any seat may be viewed as a negative by some LPs, who will be concerned that Anchor may push forward certain investments which Anchor views as strategic, as opposed to pursuing a strictly financial objective.)
- A % of the general partnership, i.e., a % of the carry pool.
- Pay quarterly __% of management company revenues to Anchor, for the first __ months after final close, and/or after management company revenues exceed $__.
- A % of the management company. Note that it’s very rare that a management company IPOs or gets acquired, so this is an investment with no logical exit door. We likely would want to structure an exit in advance. Some ways to do this:
- a pre-agreed-upon multiple on your investment;
- a pre-agreed-upon multiple on the management company revenues;
- a preferred security entitling the LP to a fixed return, which is extinguished upon the return of the anchor’s capital and unpaid preferred return
- a ‘revolving shotgun’, allowing me to set a price, and you can either sell your stock or buy mine at that price
Initial Proposal
I’m very happy to think creatively about different structures and numbers. That said, out of the menu of options above, my initial proposal that I think is fair to both parties is _____
Next steps
When are convenient times to meet to discuss?
Further reading
- How to negotiate a partner role at a VC or private equity firm
- Should you give an Anchor investor a stake in your fund’s management company?
- Anchors Aweigh: Analysis of Anchor Limited Partner Investors in Impact Investment Funds
Caveat: I’m not a lawyer; this is not legal advice.