I work with a national angel investor group that invites members (investors) to join on two general rules:
1. You cannot be a jerk;
2. You have to invest in companies.
The President of this organization has removed a couple of members this year because they received rule #1 complaints from other members.
In my funding law practice I represent and/or work with several private equity firms, angel investor groups and private equity funds. Most funds and angel investor groups run into this jerk factor issue at some point in their life cycle.
What do you do when a member is being a jerk? For traditional angel investor groups the answer can be easier. Best practice is to get the member to join based on certain membership rules which they sign to. A common rule is that if 2 other members formally complain about the jerk's conduct the President can kick the jerk out. Make sure to address in the rules what you do with membership fees that were paid by the jerk.
For private equity funds the answer is harder. They are not paying membership fees - they are investing dollars into a fund that is making long term investments. Now you have securities law issues. You can add call provisions to the operating agreement (i.e., you can buy back their membership units on certain conditions), but then you have to address the call value. If you are merely giving money back, that can cause trouble as you are giving managers a lot of room to take out investors late in the fund's life for minimal dollars. Managers risk fiduciary breach claims. If you make the call value based on FMV - that will be difficult to determine 3 or 4 years into the funds life. You also may create an incentive for fund members to want to get kicked out so they can realize the FMV of their investment before the end of the fund's life.
Some funds address the jerk factor by essentially treating fund members as silent investors - they invest money but have little or no voting rights. Managers don't have an obligation to deal with them.
Best practice for private equity funds is to be very careful upfront about who you ask to take part. If the person is going to annoy you, the other members or the target companies' teams, you may not want them to take part no matter how much money they bring to the table.
1. You cannot be a jerk;
2. You have to invest in companies.
The President of this organization has removed a couple of members this year because they received rule #1 complaints from other members.
In my funding law practice I represent and/or work with several private equity firms, angel investor groups and private equity funds. Most funds and angel investor groups run into this jerk factor issue at some point in their life cycle.
What do you do when a member is being a jerk? For traditional angel investor groups the answer can be easier. Best practice is to get the member to join based on certain membership rules which they sign to. A common rule is that if 2 other members formally complain about the jerk's conduct the President can kick the jerk out. Make sure to address in the rules what you do with membership fees that were paid by the jerk.
For private equity funds the answer is harder. They are not paying membership fees - they are investing dollars into a fund that is making long term investments. Now you have securities law issues. You can add call provisions to the operating agreement (i.e., you can buy back their membership units on certain conditions), but then you have to address the call value. If you are merely giving money back, that can cause trouble as you are giving managers a lot of room to take out investors late in the fund's life for minimal dollars. Managers risk fiduciary breach claims. If you make the call value based on FMV - that will be difficult to determine 3 or 4 years into the funds life. You also may create an incentive for fund members to want to get kicked out so they can realize the FMV of their investment before the end of the fund's life.
Some funds address the jerk factor by essentially treating fund members as silent investors - they invest money but have little or no voting rights. Managers don't have an obligation to deal with them.
Best practice for private equity funds is to be very careful upfront about who you ask to take part. If the person is going to annoy you, the other members or the target companies' teams, you may not want them to take part no matter how much money they bring to the table.
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