The General Partner Entity is governed by the Stewardship agreement. The agreement authorizes and issues two types of Shares: Class A and Class V.
Class A Shares are issued to the Management Company (“ManCo”) and to any Venture Partners who may come on board. The Stewardship Agreement provides for a reserved Share Pool for this purpose.
Class V Shares are designed for investors in the GP entity. The Stewardship Agreement provides that the sale of Class A shares will result in the automatic conversion of the shares to Class V shares. This provides a mechanism for the Management Company to sell its shares to fund the operations of the Management Company.
What are the differences between Class A and Class V Shares?
Generally speaking, Class A Shares are issued to:
ManCo (with no vesting)
Venture Partners (with vesting)
General Partners who are not part of the Management Company
Class A Shares have voting privileges and are generally designed for those active in the management of the fund.
Class V Shares are non-voting and are designed for passive investors.
Why do Class V Shares have Preference?
The “Preference” given to Class V Shares has a different purpose from a liquidation preference that you may see in startup term-sheets.
Class V Shares simply provide that upon distributions, its holders have their percentages carved out separately before Class A holders. Given that the GP controls all distributions, in practice, distributions happen at the same time.
So then why do Class V Shares need to have “Preference”?
The “Preference” has two purposes:
ensures that investors in the GP receive distributions at the same time as the principals given that Class V Shares do not have any voting rights or other protections; and
establishes a different class of shares which may be helpful for tax purposes.
If there is a sale of Class A shares that convert to Class V, this can mitigate the effect of the transaction on the value of the Class A shares. This may be important if the GP needs to issue Class A shares to venture partners at a later date.
Why do Class V shares have a fixed percentage?
In general, investors in the GP are expecting a return based on the carried interest from the fund and not the operations of ManCo. This protects the investors in the GP from having their interests diluted.
How do distributions to Class A Shares and Class V Shares work?
All distributions are at the discretion and determined by the ManCo.
A typical cap table would include the following:
850,000 Class A Shares issued to ManCo.
100,000 Class A Shares reserved for the Share Pool.
50,000 Class V Shares issued to Decile Group.
Example 1: If ManCo determines that $1 million will be distributed and there are no shares issued from the Share Pool, then the distributions would be as follows:
$950,000 to ManCo (all the proceeds after deducting the Class V distribution)($1.11765 per share).
$50,000 to Decile Group ($1.00 per share).
Share Pool does not receive any distribution because there are no shares issued.
Example 2: If ManCo determines that $1 million will be distributed and there are 50,000 vested shares issued from the Share Pool to Venture Partners, then the distributions would be as follows:
$897,222.22 to ManCo (850,000 divided by 900,000 times $950,000)($1.0555 per share).
$52,777.78 to Venture Partners (50,000 divided by 900,000 times $950,000)($1.0555 per share).
$50,000 to Decile Group (remains fixed at 5%; $1.00 per share).
For small funds set up by emerging managers, most institutional grade providers will charge at minimum $50k/year+ and they are just doing fund administration which consists of accounting and government filings. Though this is a very fair price for a complicated financial product, these offerings typically do not include business advice, deal review, treasury, etc. - and no one is there to tell you if you’re doing something sub-optimal.
With Decile Group, you’re getting institutional grade operations at a significantly lower cost than the market, and you own your fund.
For our model to work, we need your fund to achieve Decile performance to recoup our significant time and cost investment. We are unlikely to recoup the delta if your fund has average performance - we don’t want you to be average! This model aligns all of us around your success and we have been very thoughtful in these agreements to create the conditions to give you the best chance to achieve top decile performance (i.e. Class V being non-voting etc…).