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Navigating a Smooth Job Changeover In Private Equity

Mar 9, 2023

News stories and articles regarding the Great Resignation of 2021-22 often create the impression that switching jobs, companies, or even careers, can be accomplished quickly and easily.  But for professionals in private equity funds, hedge funds, and venture capital funds, transitioning between positions can be a daunting and difficult task – but one that is often necessary to realize their full professional and economic potential.  While most employees must only consider when to resign and how to tie up loose ends, employees, members and owners of investment firms must successfully navigate a web of legal and financial considerations.  Some of those considerations stem from the interplay between the various complicated agreements governing the (inevitably) complex organization and financial structure of the firm, while other considerations stem from the common law or from duties particular to those in fiduciary roles.  While this article focuses on private equity professionals specifically, many of the issues discussed below are equally applicable to those at hedge funds, venture capital funds, and other types of investment funds.


By fully understanding their rights and obligations well before resigning, departing employees can orchestrate their departures not only to their greatest financial advantage, but to avoid the wide range of pitfalls lurking in the hundreds or thousands of pages of agreements that govern the typical investment firm (the “Firm”).



Restrictive Covenants


Despite a growing trend by states to limit the scope of non-compete and non-solicitation agreements (and a recent proposal by the Federal Trade Commission to outlaw them entirely), the use of non-competition and non-solicitation agreements remains widespread, and the private equity industry is no exception.  Understanding the scope and ultimate enforceability of any such provision is a critical first step in evaluating whether to transition to a new job.  This process is often particularly tricky in the private equity context, because non-competition provisions may exist at different levels of the Firm’s structure. 


For example, a non-compete provision may exist at the highest level of the Firm, and purport to prohibit a departing employee from joining another private equity firm for some period of time.  Another Firm-level provision might restrict a departing employee along a different axis, such as purporting to prohibit him from any type of investing in a particular sector that he operated in while at the Firm.  But prohibitions often also exist at the Firm’s portfolio company level, and may seek to bar a departing employee from joining an operating company (that is, not an investment company) that competes with one of the Firm’s portfolio companies.  Complicating matters further is the extent to which such non-compete provisions will actually be enforced by the courts, and the extent to which a future employer is willing to risk a fight over whether it can hire a departing professional.  Understanding both the purported scope of a non-compete as written, and the scope of its likely enforcement is critical step in understanding what opportunities a departing employee can pursue.


Ongoing Duties to Former Employer


Most employees recognize that they owe certain duties to their employer – to be loyal, to not share the employer’s confidential information, to not create a hostile work environment, etc.  But what many private equity employees do not realize is that they may continue to owe certain duties – even fiduciary duties – to their Firm (and often its affiliates) even after they leave.


For example, an investment professional might be an employee of one entity, a member or shareholder of other affiliated entities, a general partner of others, and a limited partner in a dozen or more investment funds or even individual portfolio companies.  Upon leaving, the more obvious employee duties will end, leaving the former employee free to compete with (subject to any restrictive covenant), or to act adversely to a former employer.  But depending on how the departing employee’s equity compensation is structured, the employee may remain a member, shareholder, or limited partner of an array of entities affiliated with his former employer. This may limit the now-departed employee’s ability to fully compete with or act adversely to these entities in which they retain an interest. 


Financially Optimal Departure


While the amount of compensation or equity being “left on the table” by a departing employee is rarely overlooked, it is still frequently misunderstood.  A departing private equity employee may have received or be due to receive compensation in a myriad of forms, including a regular salary, a forgivable loan, cash bonuses, deferred cash compensation, carried interest, or direct or indirect equity interest in a management company, investment company, investment fund, or even a portfolio company (to name a few).  Frequently, each of these forms of compensation is addressed in a different agreement, and each of these agreements may cross-reference or be affected by the operation of another agreement.  In addition, each of these forms of compensation may be subject to clawback, vesting schedules, acceleration, or tail periods that will affect not only an employee’s ultimate decision whether to leave, but also when to leave. 


Equity stake provisions, in particular, often operate differently than even sophisticated investment professionals might believe.  Equity vesting may be staggered across portfolio investments or be tied to a single quarterly or annual vesting.  The amount of equity awarded, and the timing of any vesting, may operate differently during employment versus upon departure, and may operate differently in different funds even within the same Firm.  Vesting may continue during a resignation notice period, and it may not.  Often, a delay of a few weeks or months can make a significant difference in the amount of equity – of all types – that vests and remains with a departing employee. Again, untangling any particular firm’s rules to understand exactly where a departing employee stands during any given time period is crucial.


But simply optimizing a departure date is not the end of the analysis.  Where a departing employee retains any type of equity stake or revenue share in a former firm, it is important to understand what post-departure rights the employee retains.  Most frequently, the departing employee will at least retain information rights as an investor, sometimes will retain voting rights, and occasionally will retain put rights exercisable in the future.  The flip side is that a departed employee may also retain certain obligations, including the obligation to fund capital calls.  


Avoiding Landmines


Finally, and often overlooked against the larger considerations of restrictive covenants and compensation, are the myriad smaller obligations required of a departing employee.  Particularly where the departure is acrimonious, employers inevitably keep a sharp eye out for small or technical violations of an employee’s agreements. These obligations often include specific forms of notice that must be given, provisions regarding the timing and nature of any departure announcement, and non-disparagement clauses. The issue that most often causes headaches is the treatment, return, or destruction of the employer’s confidential information.  For example, while it may seem entirely innocent for a departing employee to make a copy of his or her own contacts list, an aggressive employer may view this as a violation of an employee’s confidentiality obligations.  Keeping any eye out for these less-obvious landmines is another important – and ongoing – step in the departure process.


Investment professionals must understand the rights and responsibilities governing their current roles in order to properly consider, strategize, pursue and evaluate new opportunities. The best way to avoid a potentially career-damaging mistake – or seize a career-making opportunity -  is to contact an experienced lawyer well before handing in a resignation, and to develop a strategy that untangles the webs, maximizes compensation, and minimizes restrictions.

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