How Can Hedge Fund Managers Use Founder Share Classes to Raise and Retain Capital?
Hedge Fund Law Report
Early-stage hedge fund managers face significant challenges in raising capital due in large part to the perceived risks related to a limited track record, limited resources, inexperience in running a fund management business, lack of institutional-quality operational infrastructure and lack of an institutional investor base. Because of such perceived risks, early-stage managers must be particularly resourceful in offering incentives to attract initial investor capital. One of the most attractive tools that hedge fund managers have at their disposal for this purpose is offering “founder share classes,” which generally give investors preferential investment terms in exchange for taking on some of the perceived risks of investing with an early-stage or emerging manager. This article explains what founder share classes are and how hedge fund managers can use them to attract and retain early-stage capital. Specifically, this article discusses: what managers and investors mean when they refer to founder shares; how founder share classes are structured; the key investment terms offered through founder share classes; some of the key advantages and pitfalls of using founder share classes; and some practical recommendations for hedge fund managers wishing to offer founder share classes.