Lowball Principal Offer - Negotiation Tactics
Received an offer to join a start-up tech PE fund backed by a large, recognizable MF, at the Principal level, with a background in traditional BB IBD / MF PE, MBA + a few years as a VP at another newer tech fund. Package overall looks great in terms of carry, and a very attractive vesting period. However, the issue is that the cash comp is quite low, ~$300K to start, which is lower than my PE associate comp several years ago....
Their rationale is that as they have just raised capital, management fees don't kick in until deployment begins, so in the near-term, the cash burn at the GP is being funded by the partners, and they expect a "normalization" of cash comp in year 2 or year 3.
My counter-offer is to include a "deployment based" cash bonus that varies with capital deployed in year 1 and year 2 such that this bonus is directly paid out of management fees (i'm also ok with this bonus being paid in installments versus lump sum) - would love to hear thoughts on other structures that could work here.
I'm not exactly cash constrained but the headline cash number is too low, and I'm trying to work with them to come up with a structure that, on a look-back basis in year 3 after we've deployed enough dollars, cash comp seems somewhat more normalized.
It is common for first time funds to be loss making.
Some questions to think about:
Have the founders made enough money previously?
How much more are you getting in carry compared to other places you could be? How likely is the fund going to get into carry?
Comp is one thing but what about agreeing a faster track to the next level?
They have made money before and I am quite assured that their personal balance sheets are not cash constrained. My carry is above market in terms of number of points, as well as vesting period, which is 5 years, with a monthly vesting schedule after year 1 (which has a nice cliff). However, the value of this carry is inherently riskier given this is a startup fund - a lot can go wrong (and i will have more say on deals / IC than usual in a larger fund).
The offer includes a potential promotion to partner when the fund raises their own independent fund I, but i dont ascribe too much value to this as this is not "enforceable" in any sense. I am placing a value on intangibles, i.e. I am essentially a "junior partner" already as a principal here and don't have anyone between me and the IC, so I'm willing to have a slightly lower than market cash comp in the short term, but not so low that it's a non-starter.
I have an issue trusting these verbal agreements. The most important thing in determining your comp this year is your comp last year. I like your deployment based bonus strategy, or even just heavily deferred for the first 2-3 years is another route. Unless they are really overcompensating you with carry. Then I would drop it (i.e. you would normally be due for $3m of carry but instead based on the same metrics of 2x, etc., you'd be getting $6m)
If you believe in the strategy and most importantly the founders, I would not worry too much on near-term cash comp if there is significant upside to carry and fast track to the partnership.
Have to decide how greedy you want to be / how much you want the opportunity but their rationale is total BS, they have fees they can leverage from the overall platform / other funds to make cash more in the ballpark of market
Have you agreed on what the “normalization” will look like?
Good question - not yet - part of the negotiation is that the deployment based cash bonus is a "bridge" towards a "normalization" which we will all have to negotiate in year [x[. I'm not trying to solve for massive cash comp given the high carry structure (heck, my cash targets in the counter is barely a senior associate / junior VP cash comp at a MF), but to hedge my downside, I'm solving for $400k - $500K ish of cash on a look-back basis if we're successful in deployment, and with payment terms that don't require them to come out of pocket to fund the GP level cash burn.
My rationale is - no need to hire useless associates at sub $200K comp as I can do the associate / sr. associate / VP modeling and DD workstreams solo - so just pay me my cash and normalize in the future.
Is the fund sitting within the MF or is the MF an investor in the GP? In the former you should absolutely be paid on par w the rest of their investment professionals. If the latter harder to say - but you should be able to get more. How are you guys going to even hire associates w that comp level?
The MF has provided them with capital through a JV, so the GP earns slightly less than 2 and 20 on the JV capital as it is drawn down. As deployment ramps, the GP's cash flows ramp as well but I'm trying to solve for, on a "look-back" basis, a reasonably normalized comp level, so currently negotiating an deployment-linked cash payout in the short term until they normalize comp
Is this a secondaries fund?
This is a "special situations" fund, akin to the strategy of BX Tac Opps, Apollo Hybrid value etc. Can invest across the capital structure, will seek a downside protected growth type return profile. Could also opportunistically do control oriented buyouts / majority buyouts
Bump, interested
Make sure you get a lot of carry and have it in writing my guy
Was at a startup fund early in my career. Founded by a very very wealthy guy who refused to pay market salaries and promised lots of carry. Long story short, never trust a verbal agreement.
Yep - all of the carry docs will be signed upfront before I join as a CP to me starting
Not exactly on topic but curious - how did you both think about the risk / reward of leaving more established funds to join a start-up fund? Have to admit - every time I look up the team page at my fund and have to keep scrolling down (and I am firmly 'mid-level') it's a bit 'deflating'.
On risk - I have a reasonable amount of cash / illiquid net worth at this point in my early 30s, plus my wife is also a mid-level VP at a PE fund, so on a cash flow basis we're doing ok and I can afford a short-term reduction in cash comp. That's on my personal balance sheet - but as far as risk with the newer fund is concerned, every deal I do will be tied to my personal track record and I can't hide behind the excuse of just being an execution monkey, so I'm taking that career risk and bad deals might mean leaving the industry (guess we have to come to terms with this at some point)
On reward - By being at newer funds (as I currently am), I've been able to close more deals and get better execution experience than junior VP friends of mine at larger funds (i.e. I've negotiated legal docs, sat on more boards, and become more of an industry expert vs friends of mine IMO). For this new opportunity, the Principal title is an accelerated promotion, carry is reasonable both in amount and vesting timing, and if it works, on balance the reward might outweigh the risk.
Maybe I'm naive but I don't want to be grinding at a large fund with a lot of hierarchy as I've done that before. I'm beyond caring about prestige / brand name at this point as I've had enough of that in my 20s.
Has the fund made investments yet?
PM me - I think I know which fund you are talking about.
UPDATE: accepted the offer, negotiated reasonable cash comp (still less than VP1 Post-MBA VP at UMM/MF). wish me luck hope this works. THANKS GUYS
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