When a founder, principal, or other key figure leaves a private fund manager, the consequences can reach well beyond the firm itself. A departure can trigger a key person provision that lets hedge fund investors redeem or suspends a private equity fund's investment period, and if the founders never put their own arrangements in writing, it can spark costly litigation over who owns what. Careful planning at launch, in what fund lawyers call the "upper tier" arrangements among the principals and in employment agreements with the team, can prevent much of that friction.
In this TalksOnLaw interview, recorded in 2024, Joel Cohen speaks with two partners at the law firm Akin: Ira Kustin, a private funds lawyer who advises fund sponsors and investors, including on succession planning and restructurings, and Desireé Busching, a labor and employment lawyer who advises on executive hiring, separations, and agreements.
Upper Tier Arrangements
Kustin and Busching explain why founders focused on fundraising and deploying capital often leave their own deal to a handshake or a back-of-the-napkin understanding, and how that can lead to disputes, including claims by early employees that they were promised partnership. Unlike fund terms, where lawyers can advise what is market, upper tier arrangements covering governance rights and the division of the manager's economics are highly bespoke, and they should be documented at launch with room for the firm to grow.
Employment Agreements, Compensation, and Leavers
The speakers walk through the terms to address in employment agreements: whether employees receive equity, phantom equity, or carried interest and in which entity; how and when compensation is paid, which differs between hedge funds and private equity-style funds; deferred compensation and vesting; good leaver and bad leaver provisions; and a clear definition of "cause," supported by a documented investigation before it is invoked. They explain why post-termination payments should be conditioned on a release of claims, and why, with courts scrutinizing noncompetes, a forfeiture-for-competition provision relying on the employee choice doctrine may be more enforceable than an outright ban.
Key Person Provisions and Investor Relations
Kustin explains how key person provisions are drafted and what happens when one is triggered, including investor redemption rights in hedge funds, suspension of the investment period in closed-end funds, and approval of replacements by a limited partner advisory committee, as well as the investor-relations judgment involved in deciding what to tell investors. Busching explains why fund counsel represents the fund rather than the departing individual, and how that affects investigations and communications with employees.
Tools for a Smoother Exit
The conversation closes with practical provisions: confidentiality protections for a fund's track record, trading methods, and investor information; whistleblower carve-outs that preserve employees' ability to report to the SEC and other agencies; cooperation clauses; mandatory arbitration, subject to state law and Federal Arbitration Act limits; and powers of attorney that let remaining principals sign documents on behalf of a departed partner.
What to Know Now
The Federal Trade Commission's 2024 rule that would have banned most noncompete agreements never took effect: a federal court in Texas set it aside in August 2024, and in September 2025 the FTC dropped its appeals and shifted to case-by-case enforcement against noncompetes it considers unfair. State law remains the main constraint, and a growing number of states restrict noncompetes, which continues to make alternatives such as forfeiture-for-competition provisions attractive where state law allows them. The SEC has continued to bring enforcement actions against firms whose separation and confidentiality agreements impede employees from reporting potential violations under Exchange Act Rule 21F-17, underscoring the importance of the whistleblower carve-outs discussed here.
