When A Key Man Leaves The Firm

There’s a front page story in the NY Times today about Quadrangle Group. It’s two stories in one. The first story is about Quadrangle’s use of fundraising agents with political connections to assist them in raising capital from state pension funds. I don’t know anything about that issue other than what I read in the paper so I can’t really comment on that story.

The other story is about Steve Rattner‘s departure to join the Obama administration and help with the restructuring of the US auto industry. Steve is a founder of Quadrangle and is clearly what is known as a “key man”.

In our firm, my partner Brad and I are “key men”. If either of us were to leave our firm for any reason, our investors would have the option of causing an early termination of the “investment period”. Basically, our investors could decide to halt all new investments and put the firm into maintenance mode.

That is exactly what the investors in Quadrangle are now debating. Apparently they have until this friday to make that decision.

This happened to me and my partners in late 2000 when the sole investor in Flatiron Partners, JP Morgan Chase, decided it didn’t want to be doing early stage Internet investing via the Flatiron partnership anymore. We went into maintenance mode and remain in it today. We still have a portfolio of five investments we are managing. It doesn’t take much time anymore but for the first three years after that decision was made, it was a full time job just managing the portfolio.

I talked a bit about this during my InSITE talk a few weeks ago. Here’s a short one minute clip from that talk where I addresses this issue. The clip keeps going but the relevant part ends at 8:10.

It’s not often that a key man, like Steve Rattner, leaves a firm in the middle of a fund cycle. It is more common for the departure to happen at the start of a new fund cycle. One of the great venture capitalists of all time is Vinod Khosla, who now has his own venture firm, Khosla Ventures, but he is also still affiliated with his prior firm, Kleiner Perkins. At some point, I don’t know the exact details, Vinod decided he did not want to be part of the team raising a new fund at Kleiner Perkins. But because he has obligations to his partners, investors, and portfolio companies, he will be involved with Kleiner Perkins for some time to come. That’s typically how this kind of thing happens.

The biggest and best known venture firms may not have key man provisions in their fund documents. They may have gotten beyond the point when any one partner is critical to the firm’s ability to manage a fund. But most smaller funds and newer funds are going to have these provisions and if a key man departs, for any reason, it can mean the end of the firm as an ongoing entity.

So if you are a VC or an entrepreneur, pick your partners wisely and make sure they are in it for the long haul. As I said in the InSITE talk, venture capital is a long term business and requires people who are patient and committed investors.

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Comments (Archived):

  1. bussgang

    Fred – The Quadrangle story is fascinating for both parts, as you point out. On the key man, I often reflect that there are really only two models to manage VC firms – equal partnerships where the firm is truly run jointly in a committee fashion or CEO (or co-CEO) partnerships where the firm is run hierarchically by one or two leaders. In the case of equal partnerships (e.g., Benchmark, who was our model when we created Flybridge in the same vein), there is less exposure on the key man provision because no one general partner is central to the management of the firm. In the case of CEO parnterships, there needs to be thoughtful success planning (e.g., Sequoia’s generational transition from Don Valentine to Mike Moritz et al) and there is more exposure to keyman issues. Entrepreneurs would benefit from understanding this subtlety.

    1. fredwilson

      We believe in the equal partners model as well.But we also believe firms don’t scale beyond three or four partnersSo in our model, everyone is a key man

  2. Emil Sotirov

    No “key women”? How about a “key person” or “key people”? (sorry, couldn’t stop my PC self)

    1. fredwilson

      Good pointThat’s the industry vernacular

  3. fnazeeri

    Fascinating. I hadn’t thought about this from the VC / LP perspective, but I wrote about this from the entrepreneur’s perspective a while ago. It can be a real pain when you lose “your partner” and that person gets replaced by someone you don’t have a relationship with and who may not have the same pull within the firm. The worst case is when you get a non-partner and as a result lose your advocate. As you note, “choosing well” is the best solution, but I also think it helps to foster relationships with more than one partner at the fund so you have a good “plan B” in case it comes to that.

  4. JLM

    The most important decisions we make in life are with whom to associate — in love, in life and in business. A bad decision on any of those things dooms the venture. A good decision allows us to shoot for the moon. And maybe hit it!The commitments we make in love, life and business and how we respect and honor them are what defines our character as men or women.In that quiet little space where our true character resides, we all know the right thing — the challenge and test of a good life is to ensure our conduct conforms with that realization.You never really know the character of a person until they are pressed — in love, life and business. When something desirable can be lost, when staring into the abyss, when failure is a real option. Some folks panic and fail at the lightest pressure and some show resolve as hard as a diamond willing to sacrifice or lose everything except their word, their commitment, their character.Those who rise to the ocassion — which sometimes means they suffer — are the free-est men on the earth because they were unbent by the world and have literally conquered the world. They are free men (and women). Plus they get all the good women! LOLSorry to get so preachy!

  5. Doug Kersten

    The InSITE talk was excellent. I just had a chance to watch it all. I was surprised on YouTube how much the views dropped off after the 4th video. I thought 5-6 to 9 (audience questions) were the most interesting part of the whole talk. I didn’t realize by long haul you meant 15 years. In fact, it sounds like it might reach 20 for you.

  6. Ying Ng

    Loosing a partner and their contribution is a real pain but also the “legal paperwork” involved. It’s best to let them leave once they loose their drive, plus in my situation, others began to step up and shine.