I'm in the early phases of forming a company with three colleagues to acquire CRE on behalf of LP investors.
The four partners have varying net worths, and while we'd like to keep everything equal, it might be necessary for one of us to contribute more than the others (i.e., when funding GP coinvests). How does that typically work in terms of sponsor fees/promotes? Are all cash flows, fees, and promotes typically distributed prorata to each GP Member's contribution?
Or alternately, maybe cash flow and fees are prorata, but promotes are divided equally, because that's more reflective of successful work than the size of the investment?
In deals I've analyzed, it has always been prorata across the board. It wouldn't make sense to me for someone who invested/risked less to receive the same benefit as someone who invested more into the deal. Interested to see how others feel.
Make sure it's pro rata based on cash invested, also memorialize the splits and this pay out as well as the promote and continued operations. Aka on the next deal if everyone made money and have more to invest, what is everyones min and max.
similar to what everyone has mentioned here: I'd recommend pro-rata based on the amount of cash invested, unless you envision one or more of the partners being strictly LPs / "hands-off" - if so, then you can make the case that the true sponsor / GP of the deal should receive a greater slice of the promote, subject to certain hurdles (e.g. pro-rata up to a certain return, then CF splits become more favorable to GP afterwards)
Thanks everyone for the comments. This makes sense, but just wanted to make sure.
What about if the partners decide to pay themselves salaries? Assuming all partners have similar job responsibilities, would those be prorata to contributions or all at the same level?
I think it would make sense to keep salaries uniform assuming equal level and responsibility. The partner who's contributed more will have a bigger share of GP profits (assuming pro-rata), so that should already be leveled out.
If the money partner is more hands off and isn't as involved in the day-to-day operations and execution, I've seen structures where the promote is equal across the board, but the money partner's funds are unpromoted (ie. not subject to waterfall). However, if that partner is just as active/puts in the same sweat equity as the rest of the partners, he/she would probably want pro-rata share of the GP entity.
The only time a pro-rata basis doesn't make sense is when one member of the GP assumes additional risk outside of direct capital risk, think debt guarantees, or if one GP member does outsized work in the partnership. Think one member is responsible for sourcing, acquisitions, management and dispositions while the other is only responsible for raising funds.
Other than that it should be done on a pro-rata basis.
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