The formulas, tricks and trade secrets of Private Equity

Private Equity Legal

Sample Chapter

Being a litigious world, private equity legal documents (and private equity legal fees) are ubiquitous. They may provide comfort for the potential investee, they may protect the interests of stakeholders, they may mitigate risk on the part of the private equity firm, or they may achieve any number of other objectives that private equity legal (legalese) is designed for. For the most part, the documents are superfluous to real life needs, but paranoid and delusional lawyers will try to convince you otherwise.

The following list is a very brief summary of the legalese that graces the desk of a private equity professional:

  • Confidentiality or non-disclosure agreement: used in many other industries, but in private equity, they’re mostly used to provide comfort when providing sensitive information. So, before sharing competitive secrets or financial information, investees may insist on this type document being executed by both parties.
  • Offer letter or term sheet: this document presents high-level terms, conditions and expectations of the proposed deal. Most of it won’t be legally binding, but it will attempt to converge the expectations of each party to decide if there’s a deal to be done. It may also include a clause to sign the potential investee up to a commitment whereby if he/she pulls out, a break fee will be applicable.
  • Transaction documents: this will set the legal framework for the new business structure and the purchase of shares and/or assets in the existing structure. Many of the terms in this document will build upon summarised terms that the offer letter first presented. Negotiation of the transaction documents will occur until executed and settled upon when cash changes hands.
  • Employment and management contracts: as I’ve said ad nauseum, private equity is about backing the right people. With this in mind, it is important to get a solid commitment from your top managers through new employment contracts. These contracts will have terms that favour the private equity firm (such as non-compete clauses) and the manager (such as option package details).

There are many other documents that cross tables in the private equity legal world, but the fours groups above cover the majority. I’ve only scratched the surface of their purpose and contents, but in the coming weeks, I’ll explore them in more detail.

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