I am in the process of launching a new fund. Since the beginning of the process my partner and I have leaned heavily on a business school professor with impeccable credentials and a large array of contacts. We would like to bring him on as an advisor/consultant, but to keep start-up costs low, have him take his payout from the back end. My problem is i do not know how to go about giving him a piece of the carry. Is 5% fair or too much? He will not be real involved in the day to day, rather more for investor pitches and investor relations. Any thought would be great, thx.
Sorry, maybe I was not clear; I meant 5% of our 20% performance fee, so w/ 20% return on 20 million, the fund gets 800k, so he would get 40k. Is this in line?
Define his position more clearly re: his future value to the fund , not in dollar terms but rather responsibilities. If he is to be basically a marketing tool, define that value, if he has other expertise, define and value. Many would be profitable biz relationships go by the wayside due to fuzzy expectations by both parties that were not properly defined at the outset. It is a biz relationship in the end. Also leave some room for performance increases. Offer a gaurantee of 3.5% with performance increases up to 5 or whatever. Never put your top # out first, that becomes a negotiating point and everybody thinks they are worth more. It's human nature.
Ahh, OK. Carry is typically defined as the management fee. No, $40k isn't likely going to offer much incentive, and there is no guarantee of a back end in this scenario.
Why would anyone accept a back-end payment? Especially if the biz isnt on-going, has no track record and puts the prof in a bind if you guys fail? If he accepts a back-end payment, either he'll deliver nothing or he's an idiot.