Starting a Coup

Have seen this happen before at a mentors firm. My two cents are below but I’m still a mid-level so take with a grain of salt.

Talking to him it seemed like the key would be building up a track record largely non-attributable to the founder that is excellent so you have leverage to say if you walked a significant amount of the firms track record walked out the door and would jeopardize future fundraising / viability of firm going forward or second you need to be very involved with capital formation and have strong ties with LPs who know your value and would commit to your new fund / where you were leaving to join (these two factors are obviously interrelated).

Ultimately I think to wrestle those types of economics from a founder type I feel like it would be massive knife fight where the founder would have to realize if enough people walked they would be left with less than they would if they ceded control / economics

It’s called spin-out funds…

Successful: MDP. Unsuccessful: Apollo and Vista.

That said, MDP's still on track to raise a down fund, so hard to say how much the coup actually helped, it's now on the new leadership team to perform and re-scale the platform over the next few years. At Apollo and Vista, the co-founder leading the very public coup got kicked out in both cases.

These coups almost never get publicised, so unless you're deep in a firm's internal politics you'd never know. Apollo and Vista only broke into public view because of the eye-watering sums involved and the fact that both coup leaders were also co-founders who were likely part of the key man clause of their respective firms. There are probably a ton of attempts by more junior people who are quietly fired or transitioned out of the firm that you will never hear about as it beneifts neither side to make it public. 

Congrats on a JAMMBO.

Cinven in 2023-24. Was led by other Partners.

The fight for economics is a constant issue in PE. You can see that in the number of spin-outs every year. You can also see that in the graveyard of firms who struggled with it and it led to the demise of the firm - the original GTCR, Weston Presidio, Doughty Hanson, Castle Harlan. LPs are increasingly asking for succession plans given this issue. Ultimately this is a people business and if people are leaving because economics aren't shared then the firm won't survive. 

If you were to do this successfully, you'd need to assemble a small group of indispensable senior people privately - ie the people who have clearly driven the firm's returns. Ideally you have enough support that it would trigger the key man clause if that group left. You'd also all need to be comfortable with leaving if it's not successful. And keep in mind that you have a lot more leverage if you do this ahead of a fundraise because if that group walks, they likely won't be able to raise another fund. 

If the topic hasn't been broached yet, it'd probably be better to start with a softer approach of asking the founders about the longer-term vision for the firm from a governance perspective and ideally a follow-up in writing that outlines it. Will they be expanding the IC and management committee? Is there a succession plan? How do they think about mgmt company ownership over time? If they don't provide anything concrete within a reasonable period of time, then you could turn up the pressure and threaten to walk. 

But also keep in mind that this only works if you have a group of seniors who have clearly led the returns. If you're a Principal like your title suggests, you don't have much leverage unless you've led at least a couple deals that have been exited and have built your own track record.  

Yes, have seen coups a couple of times from the outside-in as an LP. It happens all the time in the mid-market, most of the times unsuccessfully which leads to spinouts. An example is Odyssey PE in Australia which is a team from CHAMP Ventures. CHAMP Ventures founder Su-Ming Wong refused to step down although he was well into his 60s when the team asked for the reorg. OPE raised a first fund but I haven't seen a second, while CHAMP has closed down (website down). 

An example of a successful one is the partner mutiny at Hg against Matt Rourke. He was named MP but didn't last a very long time, as basically all equity partners below him banded together to have him replaced. He ended up founding his own firm. 

Think it comes down to how much of the power (equity in the management company, track record, LP relationships) the mutineers hold vs. the people they're trying to replace. Then it has a shot of being successful. Even still, some founders would rather watch the firm burn to the ground rather than give up control. 

Happens a lot in the business world. Mainly behind the scenes unless it goes into litigation.  State circuit court dockets are teaming with these cases. The world lies mostly in the grey area between the rule of the jungle and the rule of law. 

It’s not all about money; folks can do very well in life if they share or make concessions.  I’m generally against coups amongst co-founders, where everyone started from nothing and now someone thinks they are more important.  Deserves more compensation for future growth, sure that could get arranged at the payroll level; but once people think a partner is deadweight, the next thought is how to cut him out as cheaply as possible.  They are dead to them.  Very natural human thinking. It’s a ruthless world.

Many of you want to start a business, a fund, etc. Here’s how I would prevent a coup before it happens (or likely the coup happens but the ultimate buyout is better than the initial one, after some legal warfare):

• Don’t let a partner hire too many of their people (be it family members, past colleagues).  This starts very innocently, and then metastases.  Maintain some of your people in different parts of the business.  This is a Law of the Jungle strategy.

• Contracts with business clients, particularly government should be kept in the name of the HoldCo. Makes it extremely hard to do a spin out (basically a nicer name for stealing the business) and take that side of the business lawfully; without a literal act of Congress (local, state, federal). Considerable negotiating leverage can come from this. Because you can’t just change the business name.

• Avoid partners (and or key employees) with signs of high conflict personalities.  Sometimes they can be very talented.  But without power within the legal structure, they can be controlled or let go.  I recommend reading writings by Bill Eddy (applies to business and marriage). Usually in a coup situation, they shoot first then think about the legal ramifications after (painful years long litigation, where you lose years off your life and mental freedom, ultimately for what?  More money?).

• If you’ve founded multiple businesses and observe how people behave, you start to look at the operating agreement differently and with more caution about what can go wrong among partners (when business is good and bad).  Fiduciary duty language should be all over the doc.  Make it impossible to remove managers without unanimous approval or close to it.  The tyranny of the majority (folks might reluctantly align with the aggressor to protect themselves, but will face personal moral dilemma).  Some people will look at management control, even by 1%, as the mandate to cut out people from the business.  Put a clause in the OA that protects you and everyone from phantom income by requiring cash distributions to pay taxes. Avoid personal guarantees to third parties that keep you tied to the future liabilities of the business (after you’ve been cut out of the future benefits).  I’m still amazed how in the quest to get rich, people will sign up for personal “take your house” debt with people their barely know.   Build the business up enough to only take recourse at the corporate level and give up upside for other more appropriate deeper pocket parties to take that personal risk.  

• When the business starts getting good, the higher resourced partners will always want to double down and will have no problem diluting the more sweat equity partners with capital calls. 

  
  There are more lessons, but I’ll leave it to this.  Normally people who want a coup don’t think they can recreate the success (either they are getting older; had a health scare), and would rather backstab people they owe fiduciary duties to.  Not people I want to work or partner with, especially when you have choices. Would be a red flag.

Two come to mind. Kohlberg, the first K in KKR along with Peterson, the cofounder of Blackstone. They were both pushed out because they outlived their utility. 

Charlesbank? Coups can also come from the LP side ...