How to Join a VC Firm as a Partner

This post is part of a series on structuring the team and legal infrastructure of a new VC fund. Next post coming out in a week!

It’s hard enough to get a job at a VC firm; it’s even more complex to join as a Partner.

I thought it would be helpful to put together some notes on market norms and issues to consider in negotiating a partnership at an institutional investment firm. These are many of the steps I went through when I joined Coolwater Capital, HOF Capital, and ff Venture Capital as a Partner or Managing Partner. I’ve also been involved in recruiting new Partners into certain VC firms.

And I used the same systematic approach to finding my wife.

0. Strategic considerations when joining as a VC Partner

If you’re joining an existing firm, it is likely that you’ll have less leverage than if you’re a cofounder of a new firm.

In either case, it’s likely that the precise economic terms will be documented in an employment agreement, as well as very likely also the General Partner entity and possibly the management company entity of the fund, depending on your situation.

If you join a fund, you’ll invest your financial capital, but far more importantly, your reputational capital. VC is very illiquid on both the investing and the personnel side, so assessing fit is critical.

As you assess the opportunity, I suggest crudely there are three variables which drive the economic analysis: NPV * S * I, where: 

I break the fit assessment process into 8 domains: Team, Investment Strategy, Control, Compensation, Community, Culture, Finance & Ops, and Contracts.

In the negotiation, I suggest optimize for the following:

The first step of course is to look at the fund the same way a limited partner does. I suggest asking the fund to share their response to an institutional LP due diligence checklist, including their data room.

1. Team: Who’s there, and how do you fit in?

What senior turnover have you had in your history? Who joined the firm, why did they leave, and what did you learn as a result?

On what KPIs is each Partner evaluated?

For managing the fund, the firm’s leaders typically divide amongst themselves these key functions: Fund setup/structuring, Management, Marketing, Workflow/Project Management, Technology, Analytics, Fundraising, Accounting and Reporting.

For investing, the firm’s leaders typically divide amongst themselves the investing universe by industry (certain Partners focus on certain verticals /stages) and functions: Thesis , Origination, Due diligence, Investment Committee, Portfolio Monitoring, Platform (portfolio acceleration), Accounting & Reporting, Board service, Exit.

At the end of the day, why do they want you? It’s likely to address a weakness they have.

2. Investment strategy: What do you believe that others think is heresy or wrong?

What do you believe that others think is heresy or wrong? What is your unique competitive advantage?

If you’re joining the firm, you’ll inevitably impact their investment thesis.

 See 33 Questions We Asked Ourselves Before Starting Pace Capital and Alexander Jarvis’s collection of investment theses.

3. Control: Voting and veto for new deals, share of management company, and more

You’re going to make daily decisions with your colleagues on the investments you will jointly make.

For some examples of public transparency on what investors are looking for, see HOF Capital, and Georgian Partners. To assess this, you’ll want to understand who is on the investment committee, and how voting works. In any organization there will be disagreements. This is all the more true inside a VC, often made up of former CEOs. So any well-managed VC will have an articulated mechanism for making decisions, taking into account input from all parties.

The modal disagreement inside a VC: Partner X invested in a company, which is now performing below expectations.  X wants to invest more money because she’s on the board, has a closer relationship with the CEO, and failure will reflect poorly on her personally.  The other Partners have lost faith and want to cut their losses.  What should the firm do?

One proxy for understanding voting power is economics.

In theory, carry correlates with decision-making power. In practice, the Partner with a ‘hot hand’ and recent wins is likely to have disproportionate influence; the same applies to the founding Partner (s). According to the research paper How Do Venture Capitalists Make Decisions?, “Roughly half the funds [surveyed]—particularly smaller funds, healthcare funds and non-California funds—require a unanimous vote of the partners. An additional 27% of funds require consensus (20%) or unanimous vote less one (7%). Finally, 15% of the funds require a majority vote. “ For more on this, see An Inside Look at how Venture Capital Firms Make Decisions.

Bloomberg Beta open-sources their entire operating manual on Github, where their website lives.  The whole document is worth reading, but most relevant is this excerpt:

“We have an “anyone can say yes” policy. Yes, any of our team members can say yes. And no, you don’t have to meet my other partners. We believe the best founders and companies are polarizing. Our best investments might have been, originally, opposed by one or more of our partners. Teams are great at gathering information and surfacing wisdom, but terrible at making decisions. We believe in individual accountability — if anyone can say yes, then everyone feels the weight of making a decision. (That said, we do require that before anyone says yes they mention the investment to the rest of us — that way they get the benefit of the team’s input, and it’s a good way to slow down and think for a second.)”

An opposite extreme: Techcrunch asked Jeff Clavier, Founder of SoftTech VC, “With three full partners, what will the voting structure be at SoftTech? Will your vote carry more weight than your new partners or will two out of three votes get a deal done?”  He said,

“ Everyone has to support a deal in order to get it done. There is always a champion with strong conviction advocating for the deal, and he or she leads the due diligence. If and when there is a skeptic, we’ll often have that person participate in the due diligence phase to make sure all questions or doubts are answered. There is obviously respect amongst us as a team, and if one of us really wants to do a deal where he or she has an established track record, others will defer and support – unless the “over my dead body” card is pulled, in which case we pass.”

Control is also an issue over the many non-investment decisions you’ll have to make. I suggest clearly delineating responsibilities against all of the functions of an investment management firm. I suggest in certain areas one Partner is lead; others always have the right to “ disagree and commit ”. Certain topics typically require unanimity, e.g., adding a new Partner. For reference on how investment management firms design themselves internally, see Asset Management Org Structure, Monarch Investment Management Group Org Chart, Daiwa Asset Management Org Chart.

4. Compensation: base salary, share of profits, and carry

Mike Margolis, an experienced VC and hedge fund investor, suggests assessing: “Which of the partners at the firm share your skill set and how do you fit in? If you are one of six in the LP relationship area, you will have less leverage than if you are a new hire with the only European LP relationships. Are you bringing a track record which will facilitate marketing?  In assessing your likelihood of success at the firm, think about how the firm has historically created value and how it intends to do so moving forward. What do you bring to this formula? “

As a negotiating point, you’re probably going to want to highlight that numerous top-tier VCs have equal carry in funds, although often unequal ownership at the management company level.  Of course, many funds use a different model, with unequal carry and vesting based on seniority and other factors.

Blue Future Partners, a VC fund of funds, recommends equal carry: See “ How to Split the Economics “. Among the VCs who publicly share that they have an equal-carry model are Aleph Partners, Atlas Venture, Benchmark, Charles River Ventures, Eniac, Foundry Group, IA Ventures, Kepha Partners, Madrona Venture Group (in Dan Primack’s Term Sheet, June 6, 2012); Nextview Ventures, and Union Square Ventures.

A Harvard Business School study of 717 private equity partnerships by Josh Lerner and Victoria Ivashina examined how “inequality” in the allocation of fund economics between founders and their partners negatively impacted their limited partners:

“We examine 717 private equity partnerships and show that (a) the allocation of fund economics to individual partners is divorced from past success as an investor, being instead critically driven by status as a founder; (b) that the underprovision of carried interest and ownership—and inequality in fund economics more generally—leads to the departures of senior partners; and (c) the departures of senior partners have negative effects on the ability of funds to raise additional capital.”

5. Community: Where do you sit with portcos, colleagues, LPs

Who controls dialogue with each portfolio company? With LPs?

Does the firm have a CRM system ? Are all team members required to put all data into it?

6. Culture: Inertia is more powerful than you

I discuss how to assess culture in more depth in Ready to Join a New Management Team? Here’s How to Do Your Due Diligence First. Ideally, the fund will have a public statement of culture, e.g., Versatile VC, Antler, Interlace Ventures.

Remember: you’ll shape the culture, but inertia is more powerful than you

7. Finance & Ops: Do you have the resources to operate?

Is the firm profitable as a whole? If not, how much capital have the founders committed to spend subsidizing until it hits profitability?

How much capital is available to invest in the firm, e.g., staff, investment technology?

At the end of the day, you’re only as good as your back office.

8. Contract (and other legal & structural issues)

“You’re never rich enough to afford a cheap lawyer.”

How does the Limited Partner Agreement compare with the Institutional Limited Partners Association’s Model Limited Partnership Agreement ?

You’re not rich enough to afford a cheap lawyer. It’s critical you get counsel to review your docs closely. Dolph Hellman, a fund formation lawyer, wrote a must-read article in Techcrunch on issues to consider in creating a management company.   

On some recent matters I have worked with Emily Campbell of The Campbell Firm PLLC.  Emily’s advice, “When a new partner is to enter a pre-existing fund organization, there is usually a well-established dynamic among the existing partners that will necessarily experience readjustment.  How this new partner will be treated in the group goes beyond just the economics.  What initiatives the new partner will be able to take and what decisions the new partner will be able to make in the group context can be informed by subtleties in the documents regarding board positions, outside activities, access to investors, and interactions with LPs and the broader community.  An effective lawyer will assist the client in thinking through more than just compensation and carry, and think about setting up the Partner for success in the long-term relationship formalized when the new partner finally signs.”

Dror Futter, Partner, Rimon Law, points out, “If you are joining an existing partnership, step one is a review of the firm’s fund agreement.   There can be significant variation among fund terms.   These terms will define the economic pie management will divide and many of the obligations and limitation imposed on fund management.  If this is your first time as a fund manager, consult with an experienced professional to identify non-market terms in the partnership agreement.   The presence of non-market terms may reflect difficulties in fundraising or the idiosyncratic demands of one or more LP’s.   “The ‘back-story’ to these terms can give you valuable insight into the strength of the fund.  The sad reality is that a not insignificant portion of funds fail to even return investor’s money and therefore do not raise a successor funds.   Most fund “deaths” are not quick.  Funds continue in a zombie-like state during which they make no new investments and have limited capacity for follow-on investments.  During this period, most fund agreements provide for gradually diminishing management fees.  It is therefore important to understand what the partnership agreement and your employment agreement with the fund state with respect to this fund's twilight period.  For example, in some fund agreements, partners are required to devote all or substantially all of their time to the fund.  Understanding when and under what conditions these restrictions are lifted could help you avoid becoming “trapped” in a zombie fund.”

David Sorin (now a retired lawyer) said, “Assessing your value includes many elements, including experience, expertise, track record in identifying and consummating deals with high rates of return, and fundraising, among others.  Of course, compensation is critical, but so is negotiating and documenting your management role (both authority and accountability), including delegated authority and voting power.  With respect to voting power, consider your management role relative to the allocation of authority and voting power generally.”

Among the issues to consider in your negotiation:

About the authors

David Teten is the founder of Versatile VC, which backs “investment tech” companies which help investors generate alpha. He is a Venture Partner with Orange Collective, a fund of 150+ Y Combinator alumni backing Y Combinator founders. David is Chair of AltsTech, a community of investors in private companies using AI, technology and analytics to generate alpha, and Founders’ Next Move, for tech founders exploring new ideas. He was formerly a Partner with Coolwater Capital, which invests in emerging fund managers as a limited partner, into general partnerships, and into fund management companies. He was also formerly a Managing Partner with HOF Capital; Partner with ff Venture Capital; and Founder of Harvard Business School Alumni Angels of NY. He started his career as a strategy consultant, Bear Stearns investment banker, and serial founder with 2 exits as CEO.