Prioritizing Upper‑Tier Structures: Pitfalls to Avoid and the Value of Restrictive Covenants When Managing Personnel (Part Two of Two)

Upon launching a new firm, founders carefully detail the economics of the arrangement to ensure everyone is compensated appropriately. Less thought is given, however, to structures and restrictive covenants that can not only protect the firm if the founders’ relationship unravels, but also facilitate cohesive governance along the way. Foresight as to those issues can, however, drastically improve the long-term health of the company and reduce the drama associated with major events that arise during a firm’s existence. An expert panel laid out that argument in favor of advance planning of upper-tier structures at a recent program hosted by the Practising Law Institute. Moderated by Paul Weiss partner Udi Grofman, the panel featured Amanda N. Persaud, partner at Ropes & Gray; Olga Gutman, partner at Simpson Thacher & Bartlett; and Whitney A. Chatterjee, partner at Sullivan & Cromwell. This second article in a two-part series sets forth useful restrictive covenants for managing employees and related considerations, as well as problems some firms have confronted when seeking to update their internal arrangements. The first article reviewed why fund managers often inadequately address internal arrangements in their upper-tier documents, as well as strategic transactions that can trigger their relevance and material governance issues that can arise. For additional insights from Persaud and Grofman, respectively, see “How PE Can Drive Diversity, Equity and Inclusion Internally, at Portfolio Companies and Industrywide” (Mar. 23, 2021); and “How and Why Fund Managers Are Capitalizing on Co‑Investment Opportunities” (Dec. 11, 2014).

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