Joined a new fund, is this normal?
Senior monkeys, I need your advice on a predicament I am finding myself in. I recently recruited to join a lower market REPE fund from a much larger fund, where I was for a few years and on a partner track. The dream that was sold to me was that a small fund has much higher upside and their alleged track record was especially attractive.
They told me it’s their policy to have a probation period on all new hires of 6 months before they are eligible to participate in deals, and details of participation are confidential until such time has passed. In hindsight, this is a major red flag.
Fast forward a significantly longer time than the originally promised 6 month period, and after a long back and forth, I was finally given the agreement for signature. The agreement has a provision that states that if I leave, regardless of me leaving on my own or being fired, the fund can buy out my investment at a price that is lesser of original price or current market value, minus 1/3. So in other words, if I invest $1 in a project that cost $100, but is worth $80 at time of departure, I would only be given $0.53 back. A 20% drop in value would make my $1 worth $0.80 and then multiplied by 66%. Best case would be the project appreciates or retains original value of $100, where I would get back $0.66. If the project appreciates any amount above $100, the numbers will not change.
I brought up my concerns and was told take it or leave it. Anyone else experience anything like this?
This is a throwaway account to maintain anonymity
No way. If you get carry that they give you as part of your compensation package & that can get bought out at 5 cents on the dollar - fine. They gave that to you. If you put $100K into a deal and they can buy you out at 50 cents on the dollar - no. They buy you out at par. That’s your money and you invest like an LP. It’s very reasonable to go back and say I’ll sign this but only if I get bought out at 100 cents on the dollar.
Hell no. Like mentioned above they have to pay you at par. The skeptic in me is concerned that you accumulate a sizable sum of money in one or many deals and they can you to buy out your position for a fraction of par.
Not saying they would, but you expose yourself to that risk with this structure.
Also who is to say the way they value it at exit is fair. Not sure if there's detail there, but if it's something like FMV and non specific language then would clarify that too.
They could easily say oh we got appraisals 6 months ago that was $20mm, we think it's worth $15mm today and your share is worth $y. What are you going to do if you're gone at that point? Fight it? It's all arbitrary and have heard of every exec fighting with junior staff to lower valuations on payout at every firm, so be prepared to get screwed there.
Would not put a substantial amount of money in and would build something outside of this - the tactics and fact you had to go back and forth to get access to what others have been saying is a very unfair deal are all red flags. You had to argue to get access to shitty terms - that's how you're treated as an employee, imagine if you get fired or leave it will be worse.
Edit: Saw it's a take it or leave it offer - maybe take it and put the minimum amount you can (like $1-10k?) just to learn the intricacies, see the statements/annual forms, and learn about being in this position as an investor so next time at a different firm you know. Would not invest a substantial amount of money here as it's obviously a bad deal but good learning opportunity.
The whole thing has been very off-putting and has me questioning whether I made the right decision in making the jump.
You shouldn’t be questioning, it should be your answer. Have heard of dilution to LP-like returns and/or there being a vesting period where a set dilution % burns off. Never heard of anything like what you described, where you are bought out below par.
You should start recruiting for a new gig ASAP. Hiring is picking up. The principal at your new firm is effectively using the delta between par and the buyout amount to cash out their own equity position and keep both your and their upside. Talk about using your employees.
Yeah after you said that it's even crazier. Would get out asap, any way you can jump back to your old shop at the same title?
Yes, these were among my talking points with them, which led to the take it or leave it comment
Damn you walked away from partner track at a legit firm for this snake oil company?
Yes, in hindsight this was likely a mistake. Grass is not always greener.
Jesus fuck your handle combined with that gif hahahaha
This should be required reading for every mid-20's guy who hops into every thread about a less-than-ideal position and chirps 'leave!' 'take another role!' 'but the CARRY!' etc etc. Grass is always greener, and as you get more senior, the devil in the details is literally everything. Most people on here think a partnership agreement looks like the employment contract from their analyst/associate jobs. The things are 100+ indecipherable pages and one little phrase could be the difference between a seven-figure-sum and a doughnut.
In this market, always go with devil you know over the one you don't.
Also know a group of VPs who got offers and had an attorney read it over, looking back what they know now it was not a good deal and even today they withhold details and information from them (after they moved on from there). But maybe this is a good option to learn and you know for next time, because what you find a new shop get this offer and still don't know what's good or bad? This is real life experience you can get for a small amount of $.
This is also good anecdote for those who place carry/promote on a pedestal.
Once you leave a firm, your carry/promote is severely impaired. There's no transparency, no liquidity and you have even less negotiating leverage than you when you were at the firm (which wasn't much to begin with) - and the GP has absolutely no incentive to 'do right' by you or even honor the agreement after you depart. And if you think you can just lawyer up, remember that their lawyers wrote the agreements with this situation in mind, and the legal dollars out of your pocket are very real and very significant, while their legal dollars are just line item operating cost that they already budgeted.
In this part of the cycle, these dynamics are far more likely to enter into play than in the other parts of the cycle when Helen Keller was getting 40% IRR's on her deals and drowning in promote checks.
These aren't golden handcuffs but rather, rusty handcuffs. Might keep you from leaving but not for a good reason.
Sounds like you joined Grant Cardone
To OP,
Believe you have good advice. Think the 50 cents on the dollar, is meant to protect the partners, but someone above is right, you should get back 100% of what you put in. It should be greater of par or 50 cents on the dollar of value. And have the value written out.
To everyone else, you have to negotiate this before you join a firm. I'm old, people will just take advantage of your naivete.
Should also add that since there was no give on the carry language, I declined the offer. The environment has gotten quite toxic.
Ahh good decision, so are they upset because you didn't sign and pushed back? What has changed since you brought up those points/denied it?
At the end of the day you can't let people screw you, have to look out for yourself like many of these firms do that have less than honorable partners.
Describe toxic. Have they done anything because you refused to sign it?
Bonus: My bonus amount was communicated to me in writing, shortly before I refused to accept the carry structure. The actual payout of the bonus was about 15% of the amount I was supposed to get. When I brought this up to the principals, one of them told me its because performance of the company lagged. The time between the communicated amount and payout was less than 3 months. Another principal told me they don't want to pay the originally communicated amount because he believes I will take it and leave.
Unethical and in some cases illegal assignments: principals ask me to fudge the numbers when communicating to capital partners, lenders, investors.
Work load: workflow that was done by analysts is being routed to me instead. Think formatting slides, data entry, VDR management.
Edit: I am clearly being pushed out
Just wanted to thank you for posting this here. It's never easy to publicly announce "maybe I fucked up" but it is insanely helpful for everyone else to read and learn from. You'll already become a better real estate professional from this situation, but now, hopefully many others will too.
Thanks for all the replies. reflecting back on how this has progressed, this may have to be a gig I leave without anything else lined up.
This is all around crazy... How old are you? If you're under 30 I think they straight took advantage of you.... if you're above 30, I think you straight up made a bad decision..... was the larger company you worked for so bad that you wanted to leave? Really sorry to hear this type of situation...
This thread is pretty crazy; post the company name so everyone knows!
Brutal. I've certainly never seen a buyout clause in connection to performance based compensation that is that one sided.
It sounds like a very inexperienced firm, and shady on top of that. One, if you invest cash then it should be treated as LP equity and governed per those agreements. Second, incentive in the deals you work on should be treated separately as that comes from the GP side of the ledger. Vesting period is normal, but not a discount if you leave. 100% red flags. Unfortunately, there are hundreds of these 'startups" that accessed small investor capital and have next to no experience. Bright side, you recognized the issue and are getting out earlier than later.
One of the many lessons learned here, the industry is full of crooks
Any update? Are you still at the shop? Sorry this happened man, this sucks.
Actively being managed out, still deciding if I should stay until they pull the plug or leave on my own. They are proactively setting me up to make it look like it would be for cause, its very obvious to the whole team.
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