The following is an excerpt from “The Dealmaker: Defining a Fund and a Firm”, by Ed Gander, Simon Cooke and Michael Crossan of London-based law firm Clifford Chance. The chapter is part of Private Equity International Books' recently released Human Capital in Private Equity.

A dealmaker's contractual arrangements will vary from firm to firm. He may be engaged as a partner at law (governing his right to receive a profit share arising from his private equity fund's activities known as “carried interest”), an employee of his firm (entitling him to receive a basic salary and bonus), or a combination of both. However, there are certain key terms that are generically addressed in most forms of dealmaker's agreements, which are considered below. Although these may be of generic applicability to all employees, they are key in relation to a dealmaker, without whom the business would not exist.

The key driver for a dealmaker is the extent of his ownership interest, and this distinguishes the terms of his employment from other members of a private equity firm. Prior to joining a private equity firm, the dealmaker will typically be asked to warrant that he is free to enter into a contract with that firm and conduct the duties envisaged in it, so as to flush out any restrictions relating to confidential information and post-termination restrictive covenants owed to his previous firm.

Commonly, a contract will be offered to the dealmaker consisting of an indefinite term, which is then subject to six to twelve months' notice on either side. Occasionally an initial fixed term, followed by a fixed notice period thereafter, may be part of the deal, if the dealmaker is forfeiting a particularly lucrative contract by leaving his former manager. The private equity manager will generally seek termination provisions in the dealmaker's contract that entitle it to terminate without notice (or payment in lieu of notice) in a variety of circumstances including gross misconduct or serious breach of contract. The right to terminate at any time by making a payment in lieu of notice is vital if there are posttermination restrictive covenants that apply to the dealmaker. Otherwise, a termination without allowing the dealmaker to work out his notice period could amount to a breach of contract and void any restrictive covenants that the manager would otherwise seek to uphold (for instance joining a competitor within a year of departure). A “garden leave” clause can be exercised during the dealmaker's notice period to require him to remain away from the office without duties while on full pay and benefits whilst at the same time being prohibited from working for third parties.

To be enforceable, the duration of a dealmaker's garden leave clause should be limited, having regard to the balance between the manager's need to protect its legitimate protectable interests (confidential information and/or trade secrets etc) and the detrimental impact on the dealmaker by keeping him out of the market and leaving his skills unused for that period. Time spent “in the garden” should be set-off against the duration of post-termination restrictive covenants, if the total restricted period added together might otherwise be considered by a court as unreasonable.

Restrictive covenants are another key aspect of a dealmaker's contract and it is essential to tailor them to the particular requirements of the manager. Such covenants may be held as contrary to public policy and void as a restraint of trade, unless there is a legitimate protectable interest and the covenant only restricts the dealmaker in his future activities insofar as it is reasonably necessary. Non-compete covenants are interpreted by courts considering both the reasonableness of the geographical area covered within them and their duration. So, for example, a broader geographic scope might be coupled with a shorter duration to increase the chances of enforceability. There is therefore no “one size fits all” solution. The best advice is to seek cover for the minimum scope really necessary to consolidate and protect the manager's business.

A manager would also generally expect to include non-solicitation covenants in the dealmaker's contract (i.e. non-dealing with clients, investors, current employees or key contacts of the manager) in order to protect its business in the event of the dealmaker's subsequent departure. Such covenants may prove useful particularly in cases where there may be a threatened “whole team” move away from the manager.